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m LIBRARY OF CONGRESS. 






THE THEORY OF PROSPERITY 



^^!^^ 



The Theory of Prosperity 



BY n 

SIMON n! patten, Ph.D. 

PROFESSOR OF POLITICAL ECONOMY, WHARTON SCHOOL OF FINANCE 

AND ECONOMY, UNIVERSITY OF PENNSYLVANIA 

AUTHOR OF "THE DEVELOPMENT OF ENGLISH THOUGHT," ETC. 



NebJ gork 
THE MACMILLAN COMPANY 

LONDON : MACMILLAN & CO., Ltd. 
1902 

ji!/ rights reserved 



THF LIBRARY OF 

CONGRESS, 
Twc» Copies R«H5«nvED 

JAN. 21 1902 

COPVRIQHT eWTRV 

fOtASS ^ XXo. Ne4 
CDfY A, 



Copyright, 1902, 
By the MACMILLAN COMPANY. 



NotfajoolJ i^ress 

J. S. Gushing & Co. — Berwick & Smith 
Norwoo' Mass. U.S.A. 






FRANKLIN HENRY GIDDINGS 

WHOSE GENIAL COOPERATION AND FRIENDLY CRITICISM 

HAVE BEEN TO ME OF EQUAL VALUE AS 

A STIMULUS TO THOUGHT 



CONTENTS 



PAGE 

Introduction i 



PART I 

INCOME AS DETERMINED BY EXISTING CONDITIONS 

CHAPTER I 

Work and Pay 

1. Utility, Cost, and Value 13 

2. The Social Surplus ......... 19 

3. The Origin of Value 21 

4. Cost and Expense . . 25 

5. The Normal Working Day 29 

6. False Measurements of Costs 35 

7. The Conservation of the Social Surplus 41 

8. The Wages of Mobile Labor 45 

CHAPTER II 

Monopoly Advantage 

1. Market Prices 51 

2. The Limits to Price Movements 58 

3. The Elements of Market Price 64 

4. Speculation 66 

5. Competition through Monopoly 71 

6. Differential Advantage 74 

7. Price-determining Units of Supply ...... 80 

8. The Monopoly Fund 82 

9. The Burden of Monopoly 88 

vii 



viii Contents 

CHAPTER III 

Investments 

PAGE 

1. Surplus Value 95 

2. The Cause of Interest 99 

3. Funded Income 109 

4. Unearned Income , Il6 

5. The Static Equilibrium 126 

6. Income as equalized by Natural Law 134 

A Summary 14° 



PART II 

INCOME AS DETERMINED BY HEREDITY 

CHAPTER I 

Income as Fixed by Struggle 

1. Economic Freedom . . . 151 

2. Exploitation 155 

3. Adhesive Adjustment 163 

4. Cohesive Morality 166 

5. The Decline of Exploitation 170 

6. Social Integration * . • ^75 

CHAPTER II 

Income as Increased by Adjustment 

1. Mental Adaptation 180 

2. Impulse 185 

3. Idealism 192 

4. Selection 194 

5. Social Reasoning .,.*.,,**, 2Q0 



Contents ix 

CHAPTER III 

Income as Modified by Economic Rights 

PAGE 

The Source of Rights 210 

1. Public or Market Rights 216 

The Right to an Open Market. The Right to Pubhcity. The 
Right to Security. The Right to Cooperate. 

2. Social Rights 219 

The Right to a Home. The Right to Develop. The Right to 
Wholesome Standards. The Right to Homogeneity of Popu- 
lation. The Right to Decision by Public Opinion. 

3. Rights of Leisure 224 

The Right to Comfort. The Right to Leisure. The Right to 
Recreation. The Right to Cleanliness. The Right to Scenery. 

4. Exceptional Rights 227 

The Right. to ReUef. The Right of Women to Income. 

A Summary . . . 230 

A Final Restatement 234 



THE THEORY OF PROSPERITY 



INTRODUCTION 

The industrial changes of the past century have 
not advanced wages nor relieved misery to the degree 
that economists hoped. Even the most conservative 
thinker one hundred years ago, could he have foreseen 
the inventions, economies, and transformations that 
have taken place since his day, would have predicted 
a greater advance than has come. It is no wonder that 
many reformers lay the blame for this lack of progress 
on economic laws and try to devise schemes by which 
they may be circumvented. The equality that has not 
been brought by economic forces is sought in a com- 
plete social reorganization by which competition is to 
be displaced. 

That social evils are economic in their origin is a 
mere assumption. Economic laws are the outcome 
of forces acting in the present environment. Evi- 
dence for or against them must come directly from 
the relations existing between men and the environ- 
ment in which they live. All economic forces arise 
out of existing conditions and exert an influence on the 
present race of men. An environment once left is no 
longer a living force. Its effects, however, may influ- 
ence men, but it will be through heredity, morals, and 



2 The Theory of Prosperity 

traditions. The present environment acts on men 
through its economic forces ; past environments through 
heredity and its accompanying habits, customs, and im- 
pulses. Long-standing evils, therefore, showing them- 
selves in many races and at various times, are more 
likely to be the result of heredity than of environment. 
They are more nearly the same in all existing races 
than are their present environing conditions. 

Adjustment is thus due to a long series of environ- 
ments ; economic laws, to the one in which men now 
live. The conditions of past environments have no 
effect on the production or distribution of present 
wealth. Their social consequences, however, endure, 
making present tendencies the complex result of eco- 
nomic laws and heredity. It is a mistake to associate 
misery with production, and to assume that it is due to 
poverty. They are not the same, though both make men 
suffer. Poverty is a lack of resources the result of 
definite economic causes ; while misery is non-adjustment 
due to a lack of harmony between effort and result. 
The smallness of the result means poverty ; the uncer- 
tainty of the result, or the failure to produce the desired 
result, is misery. A savage puts forth a great amount 
of effort. He is miserable, not from any lack of re- 
sources, but because his effort is misdirected. A short 
period of struggle against the uncertainties of his situa- 
tion breaks down his bodily powers, puts pain where 
pleasure should be, and makes life a burden, if it is not 
cut off by complete failure. The civilized man puts out 
a similar effort, and he, too, is miserable, not because 
the return is small, but because effort and result do not 
correspond. He sees a great product pass through his 



Introduction 3 

hands, but when he looks back on his life he pronounces 
it a failure; the great product has brought misery in- 
stead of happiness. To such a man work is pain, not 
pleasure, and the goods he acquires do not produce the 
anticipated satisfaction. The breach is not between 
effort and return, but between the goods of which the 
return is made up and the mental states their use is sup- 
posed to create. Effort produces goods, but goods do not 
create happiness. Men attain happiness, not by creat- 
ing a great product of goods, but by reaching the goal 
for which they set out. The task involves the whole 
complex problem of adjustment, and not the simple one 
of production. Poverty has its causes in the present 
environment, while the general failure of men to get in 
touch with nature brings misery, whose causes go back 
hundreds of generations and affect every relation into 
which men enter. Some end other than goods must 
be reached before misery is displaced. Efforts, goods, 
satisfactions, is an incomplete cycle wearing out the 
recipient. Only efforts, goods, satisfactions, ends, 
make a complete circle, or rather a spiral, which in 
each circuit raises the individual a little above his 
former state. 

It follows from this analysis, that the real social prob- 
lem is, not as Henry George puts it, Why in spite of the 
increase of productive power does poverty persist ; but, 
Why, under these conditions, does misery grow until 
life is not worth living .? That many people regard life 
as a burden cannot be doubted, but this state of mind 
is due to a misuse of goods, not to a lack of them. The 
gap is not between effort and goods, but between goods 
and enduring satisfactions. The economic and the 



4 The Theory of Prosperity 

social problems can thus be sharply contrasted, and 
should be kept distinct. Problems pertaining to exist- 
ing conditions should not be confused with problems of 
heredity. That they are confused is the outcome of the 
historical evolution of society. Most nations have been 
formed by conquest, and therefore start with a domi- 
nant and a subject class. The former seize the surplus, 
and force the latter to work for a bare minimum. In 
primitive nations most of the surplus was connected 
with the land, so that land-owning and surplus-receiving 
were practically identical. The economists therefore 
naturally regarded the ruling and the landed class as 
one, and called its income rent. Wages thus became 
associated with the exploited classes whose return did not 
exceed their costs. Cost and wages on the one side, and 
rent and surplus on the other, were respectively viewed 
as identical, and were distinct funds going to sharply 
isolated classes. This early society was modified by the 
introduction of capital. Neither of the first two classes 
possessed prudence and forethought, since the aristo- 
cratic landlord lived in the present, and exploited its 
resources as fully as did the laborer. The qualities of 
the capitaHst were therefore in marked contrast with 
those of the other classes, and he derived his income 
from sources which they neglected. Trade and industry 
gave profits, a new income distinct from the rent of 
landlords or the wages of workmen. So long as work- 
men lacked the qualities of capitalists and traders, and 
could not become aristocrats, the social gulf between 
the classes made rent, profits, and wages distinct in- 
comes, the sum of which equalled the total product. 
The shares were thought of separately, not because 



Introduction 5 

rentj profits, and wages are economically distinct, but 
because the heredity of each class isolated it from the 
others. 

Only a few generations ago, according to received 
opinion, there was a distinct class for each kind of 
income. The landlords were isolated socially and politi- 
cally from the people who engaged in trade. The bank- 
ers and other investors were a distinct group receiving 
interest on their capital without controlling its invest- 
ment, while separated from all of these were the laborers 
doing mechanical work and receiving wages. These 
classes are gradually merging. There is no distinct 
class of landlords; business managers and investors 
come socially from the same class; and the laborers 
readily pass from the class of mere workers to that of 
capitalists and managers. Social reasons no longer 
exist for keeping rent, profits, interest, and wages apart 
because they represent the incomes of distinct classes. 
There are few persons who do not receive income in 
all these forms. The laborer owns his house, has life 
insurance, and keeps a bank account. He may also be 
foreman in some establishment, or have some position of 
trust and responsibility by which he shares in the profits 
of his employer. There is no separation of earned from 
unearned income. All except possibly the lowest labor- 
ers have some of both. Social distinctions form, there- 
fore, no basis upon which theories of distribution can 
rest. As these differences between landlord, manager, 
capitalist, and laborer pass away, the terms rent, profits, 
interest, and wages cease to be clear demarcations of 
income, and must be newly defined or entirely dis- 
carded. 



6 The Theory of Prosperity 

Great confusion has arisen in economic literature out 
of attempts to redefine these terms. Rent is viewed 
sometimes as the income of idle landlords, sometimes as 
a gift of nature arising from the cooperation of its forces 
with man, and again as a differential due to advantages 
in production. Capital and interest have almost as 
many definitions as there are writers on these topics, 
while wages may mean anything from the lowest in- 
comes of laborers to the largest salaries paid as wages 
of superintendence. 

In these attempts to restate economic theory, the 
terms rent, profit, interest, and wages do not represent 
related shares. While all assert that product equals 
rent plus profits plus interest plus wages, the part of 
this total product assigned to each share depends upon 
the definition of these terms. Each writer tends to 
minimize some of the shares and to expand others, thus 
throwing most of the income to one share. This can be 
done by defining three of the terms narrowly, and one 
of them broadly, leaving it as the residual claimant : it 
can be done by calling some of these incomes static 
and others dynamic, thus excluding the latter as tem- 
porary ; or it can be done by emphasizing the monopoly 
element, or the advantages of heredity by which one 
factor grows at the expense of the rest. In any case 
shares are marked off that will not add, the sum being 
different from the total product that is to be divided. 
Putting together the rent of Henry George, the profits 
of Walker, the interest or exploitation fund of Marx, 
and the wages of Ricardo or Clark does not give the 
total product of industry, but a much larger fund. 

If society is viewed as the outgrowth of heredity, men 



Introduction 7 

fall into certain groups, each having its income de- 
termined by the position and qualities it has inherited. 
If, on the contrary, men are thought of as in direct con- 
tact with existing conditions, the relations between men 
and nature are the only forces determining the size of 
their incomes. In a strictly stratified society the share 
of each class is distinct, and the sum of the shares 
equals the total product of industry. But if notions of 
heredity are discarded, the shares are not isolated, but 
go in a larger or smaller proportion to every member of 
the community. Each person can now with some justi- 
fication call his income what he pleases. Both land- 
owner and capitahst can claim that their incomes are 
due to work and energy with as much plausibility as the 
laborer. Henry George can make it appear that all 
improvements augment rent by so defining rent that it 
includes all the social surplus. The reasoning of Carey 
pursued to its logical conclusion makes all income 
appear to be interest. Along with the return on capi- 
tal goods he puts the income from land, claiming that 
it results from the capital sunk in its improvements. 
To this he might have added the income of laborers by 
assuming that wages no more than compensate for the 
cost to the race of acquiring the industrial qualities that 
make labor efficient. If the miseries and pains of 
natural selection are what biologists represent, the ad- 
vantages of natural ability give but a small return on 
the original expense of acquisition. I know of no 
economist who has justified in this way the gradual 
enlargement of the total share of the capitaUstic class, 
but many have gone far in this direction, and in all 
cases their interest fund will not add with the rent and 



8 The Theory of Prosperity 

wages funds of writers who so define labor that wages 
is the only legitimate income, or who look upon rent as 
the grand absorbent of all income. 

This overlapping of the conventional funds can only 
be obviated by a new classification. What this should 
be has already been suggested in the discussion of 
the difference between poverty and misery. The same 
thought may be presented directly from the standpoint 
of income. In its simplest aspect income is either a 
remuneration for costs or a surplus remaining after 
costs have been paid. Costs measure the lack of ad- 
justment. In a society perfectly adjusted to existing 
conditions there would be no costs. All action would 
be pleasurable and all income a surplus. Such a per- 
fectly adjusted society would not have the distribution 
of its income in the least affected by class distinctions, 
heredity, or tradition. Adjustment would break down 
class barriers, and make all men equal and equally en- 
dowed. Income could accordingly be turned in any 
direction, and its different forms blended in any fashion. 
Rent, interest, and wages would no longer be isolated 
funds going to separate classes. Any income may be 
thought of and properly put under either of these heads. 
Instead, therefore, of being three distinct funds, these 
shares are the bases of three view points from which 
income may be examined. Give to wages its broadest 
meaning, and both rent and interest disappear. Do the 
same to rent and interest in turn, and in the one case 
there is neither wages nor interest ; in the other neither 
wages nor rent. The first view point gives the simple 
relations of work and pay ; the second, those of monop- 
oly advantages ; and the third, those of investments. The 



Introduction 9 

income due to existing conditions should therefore be 
considered under these three heads, as in the following 
pages. Taken together, they present one aspect of 
income — income as determined by existing conditions. 
There is another aspect of equal importance — income 
as determined by heredity. The laws of heredity are 
mental and social ; those of the environment are physi- 
cal and economic. Race traits, customs, and traditions 
determine the direction in which much of the income 
of society goes, and their influence tends to divide the 
income of society into as many funds as there are 
distinct classes. Existing conditions make for mobile 
income, and would, if all-powerful, divide it according 
to some one law. The two aspects will not blend into 
any simple scheme, nor will the same remedies cure the 
evils they respectively reveal. The evils of heredity 
and tradition are overcome by modifying men ; those of 
nature by an increase of energy and productive power. 
Isolation of these problems is therefore indispensable 
to clear analysis. 



PART I 

INCOME AS DETERMINED BY EXISTING 
CONDITIONS 

A Study of Effort and Satisfactions 



CHAPTER I 

Work and Pay 

The life of men is made economic by their need of utility. 
goods suitable for consumption. Anything that satisfies 
a desire is a utility. Wants have different degrees of 
intensity, and in supplying them additional quantities 
of a commodity give decreasing pleasure. Each con- 
sumer has a scale of wants and strives so to arrange his 
goods in consumption that the most intense of these 
are satisfied. When experience proves that a given 
expenditure gives less pleasure than would a greater 
expenditure in some other direction, less of the first 
article and more of the second is bought. There is 
thus for each person a degree of satiety which he tries 
to secure for all the articles he uses. He so arranges 
his total consumption that the final increment of each 
article gives him the same pleasure. Every one has 
a margin of consumption which marks the limit be- 
tween his satisfied and unsatisfied wants. This margin 
rises when his income decreases so as to compel him 
to supply his wants less fully. It falls when an increase 
of income permits a nearer approach to satiety. 

All economic relations would be based upon these 
simple relations if the goods created by nature were 
not limited. Men, however, can increase the quantity 
of these durable goods, and the energy used in their 
production is work. This expenditure of energy is 

13 



14 The Theory of Prosperity 

normally agreeable, but in a decreasing degree with 
each repetition of a given act. When work is con- 
tinued, the surplus energy is exhausted and at this 
point work becomes pain, which, endured for the pro- 
duction of goods, is cost. It must not, however, be 
assumed that every commodity has a cost and that from 
every utility something must be deducted for the neces- 
sary costs. Pains begin only when surplus energy is 
gone, and this point may not be reached until the 
period of production is nearly completed. When his 
surplus energy is exhausted, the laborer should cease 
work and consume what he has produced. His goods 
would be transformed by consumption into surplus 
energy, and then he would be ready for a new period 
of enjoyable production. A perpetual round of pro- 
duction, consumption, rest, revival of energy, and re- 
newed production in which no pain enters is thus 
possible. 

Economists often overlook the connection between 
the consumption of goods and the creation of surplus 
energy. They think of consuming for mere pleasure, 
and then of work as a disagreeable isolated act. This 
concept has been created by the division of society 
into two classes, the one of which consumes without 
producing much, and the other produces without much 
consumption. So long as some men can consume with- 
out working, and others must work hard without an 
adequate consumption, it is easy to think of production 
and consumption as separate and distinct processes ; 
but both these classes represent abnormal conditions. 
The normal man seeks to establish a direct relation 
between his consumption and production, and forms 



Work and Pay 15 

of consumption that do not result in the creation of 
surplus energy are dissipation and hinder him in his 
struggle for existence and superiority. The dissipated 
are thus steadily ehminated, leaving those whose use 
of goods tends to create the surplus energy. Every 
increase of productive power adds to the quantity of 
goods consumed, and these if properly used augment 
the surplus energy of workers. They begin the day 
with more energy and can work longer before feeling 
pain. Free workmen in advanced societies should not 
be under the necessity of producing so long that costs 
appear. Certainly surplus energy can so increase that 
human wants can be supplied without any costs of pro- 
duction. But even if this is not so, we should bear in 
mind that production is due to energy and not to costs. 
Utility and cost are not opposites nor even necessarily 
related. Energy produces utility, and utility produces 
energy; otherwise the worker is stupid, diseased, or 
dissipated. The expenditure of energy becomes cost 
only under abnormal conditions which progress should 
make increasingly rare. Costs are merely an incident 
of production, and do not determine any of its funda- 
mental relations. 

When men realize that their command over nature's 
products is too limited to satisfy their wants, the phe- 
nomenon of value appears. A cup of water has no Value, 
value if it can be replaced from a running brook, but 
if water is scarce, each cupful has a value because its 
loss leaves some want unsatisfied. The value of each 
unit of a commodity is determined by the loss of pleas- 
ure that the consumer would undergo if deprived of it. 
Each unit being like every other unit, they all have 



1 6 The Theory of Prosperity 

the same value because the loss of any one of them 
would be equally felt by the consumer. This final unit 
of each commodity is called the marginal unit, and its 
value fixes the value of every other unit of goods capa- 
ble of supplying the same want. 

The marginal units of different goods must also have 
the same value. If the marginal unit of bread gave 
less pleasure than the marginal unit of meat, the con- 
sumer would dispose of a part of his bread and buy 
more meat. The pleasures derived from the marginal 
units of these articles would thus be made equal. Each 
person tries so to round up his consumption that the 
marginal units of all goods give the same pleasure and 
hence have the same value. There is thus a marginal 
unit of consumption the value of which is the same as 
the value of other marginal units making up the con- 
sumption of the individual. As the value of this mar- 
ginal unit of consumption rises and falls, the value of 
each marginal unit of goods tends to rise or fall to a 
like degree. Movements in value are therefore general 
and in the same direction. A rise in the value of any 
commodity causes the consumer to use a little less of 
every other commodity so as to decrease the value of 
the first article by producing more of it. A new equilib- 
rium is formed in which each marginal unit has a slight 
addition to its value because the consumer's wants are 
less fully supplied in every direction. 

Value is thus measured in utility and shows the 
degree to which consumer's wants are supplied. In 
distinction to this price is the quantity of one article 
that must be given in exchange for another. It is thus 
an objective measurement of goods by other goods. 



Work and Pay 



17 



The price of a loaf of bread is the quantity of meat, 
sugar, or other articles for which it exchanges. If the 
price of a commodity rises, it means that the holders of 
the commodity can exchange it for larger quantities of 
other articles. The prices of all goods cannot go up 
or down together. There would then be no change 
in the ratio of exchange, and hence no change in the 
price of any article. There can therefore be no general 
movement in the prices. Some must go down that 
others may go up. Herein changes in value differ 
from those in price. The former always move in one 
direction ; the latter in diverse directions. The move- 
ments of the one are general; those of the other are 
always particular and localized. 



FIG. 1 




To represent the relations existing between values, 
costs, and utility, in a diagram, the increments of the 
commodity consumed are measured by the length of 
the base line ab. The degree of utility is measured 
upward from the base line, and in the case of the initial 
increment the amount equals the line ad. Each subse- 
quent increment will have less utiHty, and if the differ- 
ent increments are arranged in order of the intensities of 
the pleasures derived from them, the line dc will repre- 
sent the decline of utility as the number of units of 

G 



1 8 The Theory of Prosperity 

commodity increase. The line be represents the utihty 
of the final unit of consumption, and the figure abed 
shows the amount of utihty derived from the whole con- 
sumption of an individual. It is assumed that the con- 
sumer takes first that unit of goods giving him most 
pleasure and that he turns to some other commodities 
when they give him more pleasure. At a dinner served 
in one course he will eat first this and then that accord- 
ing to his fancy, coming back for additional increments 
of the earlier articles when the intensity of desire for 
the articles he is eating is reduced. If the different 
increments of the dozen articles on the table be ar- 
ranged in the order he consumes them, a diagram 
representing the degree of his pleasure would assume a 
form like the one given above. 

The consumption of all the individuals in a com- 
munity or nation can also be represented by this 
diagram if their feelings, sentiments, and habits are 
nearly enough alike to create a normal type. In the 
diagram, be is the marginal increment of consumption 
whose utility determines the value of every other incre- 
ment. The figure abce shows, therefore, the total value 
of all the articles consumed, while ecd shows the con- 
sumer's surplus; that is, the amount of utility that 
consumers enjoy above the value of the goods. 

The cost of these articles is represented by the dis- 
tance between the lines af and ab. Those first produced 
have a low cost, which gradually increases as more is pro- 
duced. The line af thus gradually diverges from the line 
ab and is furthest off at the margin of consumption 
where it equals bf. The figure abf, therefore, repre- 
sents total costs. The difference between total value 



Work and Pay 19 

iabce) and total utility {abed) is the consumers' sur- 
plus. The net gain of the producers is {afce) the 
difference between total value iabce) and total costs 
{ahf). 

These two funds, the difference between total utility The Social 
and total costs, are the social surplus. In estimating Surplus, 
its amount, all the pleasures that directly or indirectly 
result from work must be put on one side of the 
account, and on the other all the pains. In primitive 
societies the pains are many, while the pleasures are 
few in quantity and limited in variety. The original 
qualities of land and men were not of a character to 
encourage production. Man, not being adjusted to 
nature, got from her a most reluctant response to his 
demands ; but the surplus increased with each new ad- 
justment between the two. 

Perhaps the most notable forward steps in man's 
adjustment to nature are due to improvements in pro- 
ductive processes and machinery. Each invention does 
away with pain and increases the quantity of attain- 
able pleasure. Greater knowledge results in a closer 
adjustment to nature, and more capital enables men 
to provide for the satisfaction of their wants a long 
time before they appear. They can thus take advan- 
tage of serial production and reduce work to a 
minimum. Transformations worked in the character 
and capacities of men are also striking and important. 
Skill is acquired only by persistent and painful applica- 
tion ; the habits fitting men for productive enterprises 
are the slow product of years ; but when a race has 
become industrial, these aptitudes, qualities, and inclina- 
tions are transmitted from generation to generation, as 



20 The Theory of Prosperity 

a permanent possession of the race. What the fathers 
did with effort the sons do naturally, and their capa- 
city is transmitted in a more perfect form to their 
successors. The skill and knowledge earned by an- 
cestors come to children in pleasing forms. Education 
is a pleasure that has no costs, the period devoted to 
it being the most joyous of all. The young of each 
generation start on their productive epoch, having 
already in hand a large surplus for which no costs 
were endured. 

Changes in nature and in producers are not the 
only causes of an increasing surplus. As consumers, 
men also become better adjusted to the goods nature 
provides. A primitive man has few wants, and these 
are mainly for articles that nature provides with diffi- 
culty. A few thousand of such men roam over a 
continent and yet have their wants but partially sup- 
plied. With progress new articles are produced that 
supply intenser wants, and at the same time all goods 
are more abundant in quantity. The appetites and 
passions of men are also modified, making them do 
and want what is more in conformity with their en- 
vironing conditions. Each new want limits the field 
in which old appetites dominated, and the great variety 
of new impulses soon brings the old under control. 

There are thus many aids to adjustment that never 
have costs, and the surplus grows as they increase in 
importance. Nature acts gratuitously ; industrial quali- 
ties are a free inheritance ; the fund of permanent 
capital is always increasing, and men's tastes and habits 
are so modified that they drain nature less severely, 
while the consumption of individuals becomes more har- 



Work and Pay 21 

monious and less exclusive ; at the same time the antago- 
nism of individual interests is reduced, enabling men 
to devote less time to mere struggle and more to true 
adjustment. With all these forces in full operation the 
surplus grows, pains decrease, and contentment becomes 
general. The old problems about costs becoming sub- 
ordinate, they can no longer account for the value of 
goods. What, then, limits the supply of goods if mar- 
ginal costs do not equal marginal utility .'* This legiti- 
mate question must be answered before the difficulties 
connected with the problems of value can be cleared 
away. 

Every healthy person starts the day with a fund of The origin 
surplus energy, the expenditure of which is pleasing, ° ^^^^* 
and makes work pleasurable while it lasts. Each 
one can produce a number of goods without any cost, 
and these goods when consumed create a fund of 
surplus energy by which the next day's work can be 
carried on. It would seem possible therefore to live 
and work without pain. Men, through the expenditure 
of energy, would replace the articles they withdrew 
from the common stock for consumption, and could 
take freely what they wanted without reducing the 
supply of goods so much that they would have a value. 
Goods would thus be as free as the water in a brook or 
as the free goods produced by nature without the aid 
of man. This condition of affairs is prevented by the 
growth of wants. The satisfaction of one want awakens 
a desire for new goods to satisfy other wants not before 
felt. The surplus energy of individuals has now more 
channels of exit, and less of it can be expended in the 
production of any one good. With an increase of satis- 



22 The Theory of Prosperity 

factions there goes normally an increase of surplus 
energy, but the rate of increase of the latter is not so 
great as that of the former. Wants grow more rapidly 
than productive power. This is an elementary law, to 
which there are no exceptions. 

It might be said that wants grow geometrically, while 
productive power grows arithmetically ; but whether 
this be so or not, the lack of productive power to satisfy 
all of men's wants is clearly apparent. A limitation of 
the supply of goods is a necessary result of this relation 
of wants to productive power. No amount of energy, 
no degree of pleasure in production, would avoid this 
limit to the supply of goods. Value is thus a necessary 
phenomenon even under the best of social conditions. 
It is due to the fact that goods must be produced, and 
not to the fact that the act of production is painful. 
Goods produced pleasurably do not have a less value on 
this account. On the contrary, they have a greater 
value. Men who enjoy their wh'ole life have more 
wants, and thus feel the limitation to the supply of 
goods more keenly than do those who suffer from pain. 
Every new pleasure forces up the margin of consump- 
tion and leaves a greater field of unsatisfied wants. 
Values thus increase through the pressure of wants. 
Pain, on the other hand, limits the wants of men to the 
few things that allay it, and thus decreases values 
until at length a point is reached where suicide is 
rational. Then only is the sum of values equal to costs. 

Thus the real cause of value is not to be found in 
men's pains, but in the limitation of goods due to the lack 
of time to produce more. Each day has only twenty-four 
hours, of which eight are for sleep, and the remaining 



Work and Pay 23 

sixteen must be divided between production and con- 
sumption. With the growth of productive power there 
are goods to consume, and more time is needed for their 
consumption. The working day must, therefore, grow 
shorter with each increase of productive power. The 
supply of goods being less in proportion to men's wants, 
values go up. A keener, more active life results, but in 
the end men are farther than ever from complete satis- 
faction of their wants. 

The need of limiting the time of consumption de- 
stroys some of the utility of goods. A dinner eaten in 
fifteen minutes affords less enjoyment than if an hour 
is taken. Houses that can be enjoyed but a few hours 
a day, horses that can be but occasionally used, clothes 
that are seldom worn, and other articles that from lack 
of time are rarely seen, lose much of their possible 
utility. There is thus an interference in consumption 
due to the fact that no one article can be fully enjoyed. 
This loss of utility sets the natural limit to the day's 
work. Men stop working when the utility of the new 
article is less than the loss of utility in the use of the 
already existing stock of goods, suffered because the 
time of their consumption is cut down. The value of 
each moment's time to a consumer is fixed by the gain 
in utility which a larger enjoyment of the existing stock 
of goods would afford. Any article that takes this time 
to produce will not be made unless its utility is greater 
than the value of the producer's time to him as a con- 
sumer. The marginal article produced always has this 
value, and thus measures the interference in consump- 
tion. These facts may be illustrated by the following 
diagram. 



24 



The Theory of Prosperity 



Let the line ab represent the sixteen hours of each 
day used in production or consumption. The utiHty of 
the first article produced is equal to ac, while that of 
the succeeding increments is measured by the distance 
from the line ab to cd. At d there is no surplus and 
hence no further inducement to work. The line ae is 
drawn so as to measure the loss due to the lack of time 
to enjoy fully the goods already produced. This loss is 
slight on the first articles produced, but when the period 
of production is extended through many hours, the loss 
becomes serious. Each added hour of production 
forces the consumption of goods into narrower limits, 
until, at length, their utiHty is practically destroyed. 



FIG. II 




The line ae therefore diverges farther and farther from 
ab as the working day is lengthened. It also diverges 
more rapidly if the productive power of the laborer is 
high than if it is. low. The more goods he produces in a 
given time, the greater is the interference in consump- 
tion and the greater is the loss resulting from a further 
use of his time in production. Under these conditions 
the working day is not equal to the line ad, representing 
the time during which a surplus can be obtained. Its 
length is fixed by the point g where the lines ae and cd 
cross. The line fg measures the surplus at this point, 



Work and Pay 25 

and it also measures the loss through the interference 
in consumption. The gains of working would be offset 
by loss through the impaired consumption of the goods 
already produced. The line fg is therefore the margin 
of consumption, and each increment of goods has a 
value equal to its utility. It does not, therefore, need 
the presence of pain to give a value to goods if they are 
produced by men with varied wants. The limitations 
of time suffice to check the increase in the supply of 
goods, and goods limited in quantity always have 
value. So long as wants grow more rapidly than pro- 
ductive power, the supply of goods will fall short of the 
demand. 

There are two methods by which to measure the Cost and 
obstacles which stand in the way of production. A ^^P^^^^- 
man may think of himself as in direct contact with 
nature, struggling to obtain from it the objects of 
desire ; or he may think of himself as possessing a 
number of articles, and exchanging them with other 
persons. In the first case the measure of value is the 
pain or discomfort of this direct conflict with nature. 
An isolated person would be conscious of nothing but 
of the difficulty arising when he tries to provide for his 
wants. Each bushel of wheat or pound of cotton would 
mean a certain amount of effort expended, and the 
value of the product would be equal to the pain of his 
effort, and the accompanying loss of time. 

But when a complicated industrial system arises, men 
supply their wants by exchanging what they have pro- 
duced for goods possessed by others. The problem 
now is to get from others as large a quantity as possible 
of their goods, in exchange for a given amount of one's 



26 The Theory of Prosperity 

own goods. The measure of value now is not the 
obstacle imposed by nature, but the amount of goods 
that must be given up to induce others to make an 
exchange. If a bushel of wheat must be given for 
four yards of cloth, it makes no difference to the man 
who gets them in exchange what the difficulties of pro- 
duction were. The cloth gets its value to the new 
owner from the value of the wheat he gave up to 
secure it. 

In the exchange of goods the costs play no part 
unless the person who receives the goods can make 
them himself. Were a tailor to demand six pairs of 
shoes for a suit of clothes, the shoemaker would not 
make the exchange if he could make a suit of clothes 
with less labor than he could make the shoes. Here 
costs would at least check the rise in price of clothes, 
and if the tailor could also make shoes he would have 
a similar check to the rise in price of shoes. But these 
checks to the rise in price of exchanged articles disap- 
pear under complex industrial conditions. Individual 
producers cannot make the articles they get through 
exchange, nor can they always produce the whole of the 
article upon which their purchasing power depends. 

The division of labor takes from workmen the ability 
to make many of the articles they consume. They in- 
crease their purchasing power only by producing more 
efficiently the article they offer in exchange. This 
fact throws costs into the background as a regulator 
of value. The interest is now centred not in the cost of 
production of the commodities secured in exchange, but 
in their expense measured in terms of the goods 
given up for them. Cost is the effort of producing 



Work and Pay 27 

commodities ; expense is the inducement necessary to 
get others to produce them, and this inducement is 
usually much greater than the sum of the producer's 
costs. If a workman gets three dollars a day in 
one occupation, a demand for his labor in some other 
direction is effective only when a larger sum is offered 
him. It matters not that his costs are only a dollar a 
day. He will not give up a position worth three dollars 
a day except for a greater wage. There is in this case 
a sacrifice of a surplus of two dollars a day, and one 
must be compensated for his sacrifice as well as for his 
actual cost. Expense must always equal the sum of 
sacrifice and cost. 

Sacrifices differ from costs in that they demand the 
giving up of one form of surplus to get another ; but there 
is no pain involved in this substitution. The only pains 
are the costs resulting from man's contact with nature. 
The net surplus of a society is not the total utility of 
its goods minus the sum of its sacrifices and costs. 
Sacrifices represent merely a sum of utility taken from 
one group of persons and given to others. It is there- 
fore a problem of distribution and not a question of the 
difficulty of production. From the total utility of all 
the goods there is but one real deduction. Total utility 
minus the costs equals the social surplus. But the mar- 
ginal increment of consumption must have a value equal 
to marginal expense, and this equals the sum of costs 
and sacrifice. Expense thus includes an element of 
pleasure as well as an element of pain. With the 
advance of society the former increases and the latter 
declines. Sacrifices thus become the main element in 
the measurement of value, and in the end may become 



28 



The Theory of Prosperity 



its sole measure. Painless effort would still have a 
high value if the unsatisfied wants of men were many 
and intense. A free workman has many opportunities 
for employment, and these enable him to demand of 
his employer a compensation for the loss of surplus he 
could get from them. The following figure will illus- 
trate these points. 

Let the quantity of goods be measured on the Hne ab^ 
the costs by the distances between the lines ab and ef^ 
and the sacrifice by the distances between the lines fc 
and fe. The workman will think both of the cost and 
the sacrifice involved in production, and will demand a 




reward equal to the distance between ab and fc. The 
consumer, however, will have in mind only the relation 
of utility to expense. The pleasure derived from each 
increment will be compared with what he must lose to 
get it. The net utility of each additional increment of 
consumption grows less, and its expense grows greater, 
until the two quantities are equal. The point c indi- 
cates where the surplus of the consumer falls to zero. 
This will be the margin of his consumption, and the 
point where production ceases. No further exchange 
takes place, because one of the parties has nothing to 
gain by it. The producer still has a surplus equal to 



Woi'k and Pay 29 

the line eCy but he secures no gain by more work, the 
interference in his consumption due to longer hours of 
work creating a loss equal to the gains from this work. 

The length of the working day may be viewed from The normal 
two standpoints. The employer is interested in the net "^^'^^^'^S 

day. 

surplus left after the cost of the labor has been paid. 
The pleasures and pains felt by the laborer are disre- 
garded except as they affect the net surplus of industry 
retained by the employer. It is in his interest to con- 
tinue production as long as the net produce grows. 
Should work stop before this point, the laborer has a 
net surplus in all he produces. The return on capi^ 
tal, however, is less than it might be. The working day 
extends to the point where cost and value are equal only 
when the number of laborers is so great that they are 
willing to work for a bare living. The classical econo- 
mists assume that this is always the case. The laborer 
is said to work for a living, while the capitalist is work- 
ing for a profit. The interests of the two thus coincide, 
and production continues until the final act has no sur- 
plus. Dependent laborers are always in this position. 
They must work for necessities and not for utility. The 
working day is therefore extended until a further exten- 
sion of the working time yields no profit. 

A free workman works for utility as well as his 
employer, and hence his only rational standard is the 
gross or total utility derived from a day's work. Hav- 
ing the option of working for other employers, or of 
entering some business on his own account, he cannot 
be compelled to work merely to increase a net produce 
in which he does not share. Net utility is a standard 
only when one person desires to measure the gain he 



30 The Theory of Prosperity 

gets in working with or for another person. So long as 
A gets a net gain in working with B it pays him to con- 
tinue the operation. The point of no net gain marks 
the place where this cooperation ends, but it does not 
determine the point where A will cease working. He 
might have stopped earlier if he had been alone or he 
might have worked longer. When alone, the gross 
return in utility controls his activity. A Crusoe or a 
peasant farmer will work while his energy lasts, but 
will stop when fatigue is felt. He wants the greatest 
amount of utility, but this is secured only through the 
greatest amount of energy. If he works until his pains 
balance his pleasures, his energy falls off and the next 
day he is less capable of work. Great energy and pain 
are incompatible; the latter must be shut out, or the 
former will be lost. The conservation of this energy de- 
pends upon a series of transformations that must be com- 
plete and uninterrupted. Energy exerted on materials 
produces goods, which when consumed create utilities, 
and the enjoyment of utilities through physiological 
changes restores the surplus energy. There should 
be no loss in this round of changes. The energy of 
the next day should at least be equal to that of the day 
before. Pains always involve some loss in this fund of 
surplus energy. A pleasure counteracted by a pain 
does not end in the restoration of the surplus energy 
with which the circle of changes began. If many pains 
must be endured, the tone of the workman is lowered, 
his power to enjoy utiHty falls off, and his surplus energy 
disappears. He becomes a mere automaton valuable to 
society only through the net surplus he creates for 
others. 



Work and Pay 31 

In the consideration of pain two kinds, the tempo- 
rary and the enduring, must be kept apart. There 
are bound up with production many irregularities and 
accidents involving pain. Harvests are irregular ; cold 
snaps and heat waves come suddenly ; floods and fires 
devastate ; machinery breaks down ; and in each case 
pain must be endured to save a destruction of property 
or Hfe. A capacity for the endurance of pain must be 
cultivated to meet these exigencies, but the motives for 
facing them boldly should not be a mere desire to get a 
greater individual pleasure than pain. The general wel- 
fare should be in the foreground. To endure pain for 
hire is degrading. A soldier should not fight because 
the pain of getting wounded is compensated for by the 
pleasures of the campaign or by the leisure of the hos- 
pital. The end of war is the removal of some great evil 
through which a nation secures greater permanent pleas- 
ures with no deduction or tribute. Each temporary 
pain in industry should be faced so as to remove it. 
The loss of one individual in this case is made up, not 
by his compensation, but by the feeling that all men 
are better off. " Never to endure pain for mere wages " 
is a rule that removes actions of this kind from an 
economic to a moral plane. 

Permanent pains have, however, no moral quality. 
Men who suffer from them sink in the scale of being, 
and lose in the end all their moral qualities. Pure 
fatigue, encountered every day, belongs to this class. 
Cost, as it is understood in economics, is the regular 
endurance of fatigue due to the extension of the 
working day after the surplus energy of the worker 
is exhausted. The pains of each day counteract its 



32 The Theory of Prosperity 

pleasures, leaving no normal surplus of utility to be 
transformed back into surplus energy. The physical 
being thus deteriorates, the capacity for pleasure is 
gradually lost, and work becomes a drudgery performed 
only under pressure. Men should face temporary pains 
boldly, but for the grind of mere fatigue they should 
accept no compensation. The expenditure of surplus 
energy is pleasurable and adds to the total sum of the 
day's enjoyment. Work should cease before it is gone. 
There are two ways in which the relation of the curve 
of activity and that of utility may be viewed. The fund 
of activity maybe put to use in creating material objects 
or in modifying the external environment. There is 
then a return current of goods capable of creating satis- 
faction. It may also be said that the nutriment and 
stimulus of satisfactions create a fund of surplus energy 
which finds a vent in pleasurable activity. In either 
case the connection of the curve of activity and that of 
the utility of satisfaction is plain. Utility should pro- 
duce activity, and activity should produce the sources of 
satisfaction. When utihty produces activity, the con- 
sumer is normal. When energy produces goods for 
consumption, the producer is adjusted to his environment. 
The pleasure of getting would then be as intense as that 
of consuming, the motives for production being stronger 
or weaker as the desire for the goods grew or fell off. 
In this case a strong desire for an article would be ac- 
companied by an equally strong desire for activity in the 
direction demanded by its acquisition. As the want 
became partially satisfied the intensity of the pleasure 
of consumption would diminish, and at the same time 
the desire for activity in this direction would be reduced. 



Work and Pay 



33 



The curve of pleasurable activity would then be the 
same as the curve of utility created by consumption. 
The normal working day under these conditions is 
represented by the following diagram. 

Let the quantity of goods produced in a day be 
measured on the line ab^ their utiHty by the distances 
between the lines ab and cf, and the pleasure or pain of 
their production by the relation of the lines ab to dg. 
The laborer starts the day with a fund of surplus energy 
which it is pleasurable to exert. The distance of the 
line de below ab measures the pleasure of activity. At 
e the surplus energy is exhausted and the work ceases 



— "---..^^^^^ 


FIG. 


IV 


^^\/ 


^ 


, 


- — / 


<? 


h 


^___^' 







to be agreeable. If continued longer, it becomes pain- 
ful to the amount indicated by the distance between eb 
and eg. The normal motives inducing a free man to 
produce cease to be effective at e. He works no longer, 
unless some danger threatens the goods he has already 
.acquired, or exceptional circumstances arise. A storm, 
a fire, or an accident will stimulate his energies, but 
when the crisis is past he will increase the period of 
rest until his normal condition is restored. 

The workman begins each day with a fund of surplus 
energy equal to area aed, in the expenditure of which 
he produces goods to the amount of ae. These goods 



34 The Theory of Prosperity 

in consumption yield a utility equal to the area aefc^ 
making the total pleasure of the day equal to the area 
cdfe. This utility in turn is transformed into surplus 
energy, giving the workman a new fund of energy 
equal to the area aed with which to work the next day. 
The work could be kept up in this way from day to 
day without any deterioration on the part of the 
laborer. Should the working time be extended beyond 
the point e, the pains endured counteract some of the 
utility created, and it therefore is not transformed back 
again into surplus energy. Each day of such work 
would reduce the laborer's fund of energy, cut off 
his pleasures, and force upon him a mere mechanical 
existence. 

Should the laborer view his welfare in terms of value 
instead of measuring it in terms of utility and energy, 
the same conclusion would be reached. As additional 
quantities of goods are produced, the interference in 
his consumption increases. Each article is less fully 
enjoyed if he uses more of his time in production. 
The distance from the line ae to af measures the inter- 
ference in consumption. At the point e this loss is as 
great as the gain in utility derived from the further 
production of goods. 

The line ef marks the margin both of production and 
of consumption, and therefore would be the limit to 
the increase of value. So long as the condition of the 
workman is normal, it does not matter whether he 
measures his welfare on the basis of utility, energy, or 
value. They all coincide because their amounts are 
dependent on the same ultimate conditions. If the 
surplus is fully conserved, energy is transformed into 



Work and Pay 35 

goods, goods into utility, and utility back again into 
energy. While this fund is stored up in the human 
system it is measured by the surplus energy it can 
create ; when in the form of goods it is thought of as 
values, and when goods are consumed it becomes utility. 
Unless the fund is not conserved in its transforma- 
tions, the three modes of measuring harmonize in their 
results. The normal condition of the laborer is deter- 
mined by this harmony of results. The working day 
cannot be so extended that the pain of fatigue regularly 
occurs, without destroying that part of the social surplus 
stored up in him. All painful effort is overtime, and 
should be paid for at higher rates. Each individual 
must conserve his own part of the social surplus, or 
society suffers as well as himself. 

The theory that costs determine value rests upon the False meas- 
notion that labor is disagreeable. There have always ^^^[^^^'^ °^ 
been, however, ways of expending energy that were 
regarded as pleasurable. The warrior exerts himself 
more violently than a workman, and yet each of his 
acts is looked upon as a source of enjoyment. So, too, 
hunting, fishing, and athletic sports are regarded pleas- 
urable occupations. The end the sportsman or the 
athlete has in mind is not the product he creates, but 
the pleasure of the pursuit. It cannot be said that 
activity or even strenuous exertion is painful so long 
as there are ways of exerting energy that every one 
highly enjoys. 

Labor is irksome not because regular bodily move- 
ments cause pain, but because of the disagreeable 
associations connected with it. In early societies men 
were divided into the free and the servile. The free 



36 The Theory of Prosperity 

man showed his superiority by abstaining from pro- 
duction. A servile class worked while he protected 
them, or at least prevented others than himself from 
exploiting them ; and thus work is associated with ser- 
vility. The notion that rest is better than activity is 
due to these ancestral conditions. An overworked 
servile class readily acquires the feeling that the highest 
state of existence is one of inactivity. Cut down the 
hours of labor so that some surplus energy remains, 
and other forms of activity will spring up with pleasing 
associations. With new social conditions other associa- 
tions can be formed, making industrial occupations hon- 
orable, and thus making them pleasurable. Surplus 
energy is the normal result of the consumption of 
goods. The utihty of these goods is merely an index 
that they can through physiological changes be trans- 
formed into surplus energy. The more the utility, the 
greater is the amount of surplus energy they are capa- 
ble of generating. The fund of energy that a man can 
exert should be as great as the fund of utility enjoyed 
in consumption. Normally the man who consumes what 
he produces would generate enough surplus energy to 
reproduce the goods used up in consumption. And 
these acts would be physiologically pleasurable. Con- 
sumption would create pleasing mental associations to 
supplement the pleasing physiological sensations if the 
workman were sure that all he produced would be his to 
enjoy. Isolate a man from all his fellow-men, and the 
associations connected with work are agreeable. It is 
only when labor is socially despised that he feels its 
irksomeness and tries to avoid it. 

Misery and costs are not synonyms. There are a 



Work and Pay 37 

thousand sources of misery which have no connection 
with men's endeavor to supply their wants. Those that 
do not work are often at the point of committing sui- 
cide. Work may even destroy the misery due to other 
causes and make the worker happier than though it 
were not performed. A woman worrying over servants 
and social etiquette may be much less happy than a 
mother who does her own work and cares for her chil- 
dren. A poorly cooked meal makes a day miserable, 
and yet the sufferer, if a worker, charges it up as costs 
when it ought to be put on the ledger as due to his 
social life. 

Production is a contact with nature. This usually 
has its ten hours each day. The other fourteen hours 
belong to leisure and to social life. The balance of 
pleasures and pains of these hours should not be con- 
fused with the similar balance of the hours of work. If 
the happiness of home life is marred by discord ; if food 
is not properly cooked ; if sleep is disturbed ; if the 
social status is not satisfactory ; or if other evils reduce 
the happiness of the hours of leisure and recreation, — 
the pains endured are not economic costs. They have 
nothing to do with production, and it only creates 
confusion if the worker gets his two ledgers mixed. 
Costs are the necessary pains of production. Men 
produce to consume, and their pleasure in consumption 
outweighs the pain endured in production. But this 
does not mean that they should add up all the 
pleasures enjoyed in a day and compare them with all 
their pains under the title of costs. Is life worth living ? 
is one problem ; Do costs exceed the utilities produced } 
is another. The former is decided by gross figures ; the 



38 The Theory of Prosperity 

latter demands a critical analysis of the returns. The 
utilities in the latter case are the net utilities, the differ- 
ence between the gross pleasures of the day and the 
pains that grow out of or are associated with them. 
This net sum is the economic utility for which men 
strive, and the sum of which should exceed costs. The 
pleasure of living minus the misery connected with 
leisure must exceed the costs of production. Only 
when the ledger is kept in this form can the nature of 
costs be clearly seen, for much of the so-called costs 
of work are parts of the misery of leisure. A man 
does not feel that working is dishonorable or degrading 
when working. This feeling comes during his leisure 
hours, when he associates with people who do not need 
to work. Their opinions interfere, not with his produc- 
tion, but with his social status. It is not correct to put 
the social penalties imposed on workers among costs. 
Production is a relation between men and nature, and 
only nature's pains are costs. Social penalties belong 
to the miseries of leisure, and should be charged up to 
their proper account. 

There is another fund of misery that is wrongfully 
charged up as costs. Dissipation is a bad use of one's 
leisure and goods in which men indulge from a bad 
method of keeping their accounts. They think of the 
immediate pleasure of a vicious act as its utility, and 
associate its evil effects with the costs of the succeed- 
ing epochs of production. A man who spends his 
wages Saturday night and Sunday on liquor, finds him- 
self on Monday without the surplus energy needed to 
do his work. The bad effects of the dissipation linger 
all the week and make his life miserable. These pains, 



Work and Pay 39 

which are really the penalties of dissipation, he associ- 
ates with the work he is doing and imagines that his 
costs are great. Had he used his wages to secure 
normal pleasures, none of the pains would have been 
felt and the work would have been agreeable. 

When men feel the effects of age, they charge up 
the pains they endure to the work they have done. In 
reality, however, most of such pains are due to acts 
connected with their periods of leisure. They have 
carelessly exposed themselves, indulged in harmful 
luxuries, deprived themselves of necessary sleep, worn 
improper clothing, and done a thousand other acts to 
exploit temporary pleasures or to maintain their social 
position. Most diseases come from stomach troubles, 
weak lungs, heart failure, apoplexy, and other results of 
indulgence and carelessness. The diseases of the 
well-clothed, well-housed, well-fed laborer are few, and 
these alone can be properly reckoned as costs. 

In judging of costs it is necessary to keep in 
mind the contrast between struggle and adjustment. 
Struggle is a relation between men. By it is deter- 
mined who shall have the superior positions, who 
shall consume the goods produced, and who shall dis- 
place his neighbor. All these efforts, no matter how 
painful, merely dispose of what has been produced. 
They do not aid production ; on the contrary, they les- 
sen its amount. Production is determined by the degree 
of adjustment; distribution, by the intensity of struggle. 
The one follows laws fixed by nature ; the other is 
social and is augmented or abated by the customs 
and institutions of society. The pains of struggle 
are not costs; they are endured to get goods away 



40 The Theory of Prosperity 

from others, not to create them. Only acts of adjust- 
ment are production, and its pains alone are costs. 
But even these acts are not necessarily costs. The 
goods enjoyed by men are not wholly the results of 
their labors. The natural power of the land, wind, 
water, and sun help men in production and are em- 
ployed by men without any costs. Besides these natural 
forces, the results of past civilization aid in the re- 
duction of costs. The original qualities of the land 
have been improved, much fixed capital created, and 
many obstacles to production have been permanently 
removed. Each generation finds itself better off than 
its predecessor. Great improvements have also been 
made through inventions, discoveries, and other addi- 
tions to the general stock of knowledge. Men have 
also been made better by the transmission of industrial 
qualities. Acts painful to the fathers become pleasur- 
able to the sons through inherited modifications of the 
muscles and nerves. Adjustment thus gradually be- 
comes more easy unless stopped by the intensity of 
struggle. 

All these considerations must have weight when men 
seek rationally to determine their costs. A struggle 
for supremacy must be prevented, dissipation avoided, 
and disease removed before all pains should be included 
in costs. When this time comes, the surplus energy of 
men will be great enough to supply their wants without 
extending the time of labor beyond the point where 
fatigue begins. In the meantime costs are real, but 
to those forced into unfavorable positions they are not 
as great as they seem, and have little influence on the 
value of goods. The less fortunate are crushed by the 



Work and Pay 41 

pressure of struggle and not by the pressure exerted on 
them by nature in the form of costs. Misery is not a 
product of nature : it is man-made. 

The surplus is the net proceeds remaining after the 
expenses of production have been paid. This fund can 
be used for enjoyment without interfering with the 
process of production. It is the difference between the 
cost of production, including the replacement of fixed 
capital, and the total utility goods yield when used. 
There is thus a fund continued over to the next epoch 
of production to aid in subsequent production and one 
that is apparently used up. The distinction, therefore, 
has been drawn between productive labor making goods 
that aid in subsequent production, and unproductive 
labor creating utilities destroyed in the enjoyment. 
Each epoch of production starts with the appropriation 
of some natural forces, agents, or material, and ends in 
their disappearance by consumption. A series of crea- 
tions, transformations, and final destruction of goods 
make up the economic life of a nation, and the social 
surplus seems a disappearing fund of which nothing 
more is heard. 

This view of production is the result of thinking of The con- 
the economic process merely in terms of goods. Com- servation of 

, . . , , . , , . the social 

modities appear apparently drawn freshly from nature, surplus, 
and disappear again in the chaos of destroyed material. 
But while the material returns to nature, its essence is 
not lost, but reappears as vital energy. Through the 
enjoyment of utilities the body is refreshed and built up. 
The physiological changes following the enjoyment 
of utilities end in the generation of energy which ex- 
presses itself in activity. Productive labor is that which 



42 The Theory of Prosperity 

reappears in goods; productive consumption is that 
which comes to sight again as energy capable of pro- 
ducing goods. Even if the economic process is viewed 
solely from the standpoint of goods, the normal con- 
sumption of individuals indirectly creates goods by 
creating energy, thus making future production possi- 
ble and pleasurable. In each epoch one fund of energy 
makes capital to assist the production of the subsequent 
epoch, and another fund is through consumption trans- 
formed into energy again, and as energy utilizes the 
productive instruments made in the preceding epoch. 
All the energy of the first epoch thus reappears to 
assist in the second. Energy under normal conditions 
is never lost. It reappears again and again so long 
as waste or needless dissipation are avoided. 

The social surplus is thus an enduring fund, disap- 
pearing only to reappear in some new form. Goods 
become utilities, utilities are transformed into energy 
which, as work, creates new goods. The round of 
change is perpetual, and in all of its changed forms the 
surplus is a source of pleasure. While goods are being 
consumed, the enjoyment is called utility; when surplus 
energy is being expanded, another fund of pleasure 
arises from the love of activity ; and when this activity 
creates goods, they in their relations to the workmen are 
the source of aesthetic pleasures. Goods destroyed in 
use are utilities ; aesthetic feelings are aroused not by 
this destruction, but by the contemplation of what is 
produced, and through the relations that exist between 
enduring products. Instead of these two funds of 
pleasure being the same, they are opposing uses of 
goods. The aesthetic element disappears when the 



Work and Pay 43 

process of consumption begins. It lies in the relation 
of goods to one another or to their producers, but is 
never a relation of goods to their consumers. An 
aesthetic complement is injured by any loss of its parts 
or relations. Goods for consumption cannot be enjoyed 
without this loss. The two kinds of pleasure are thus 
distinct, and they in turn are different from the pleas- 
ure of activity. 

In its circle of change the social surplus thus assumes 
three distinct forms, and in each of them it is a source 
of pleasure. The worth of life is not to be measured 
by the utility of goods consumed, but by this fund plus 
the pleasure of activity and aesthetic enjoyment of 
goods. Utihties that do not reappear as pleasurable 
activity, are bad, and so is any activity that does not end 
in some aesthetic enjoyment. The test of each is that 
it is followed by the pleasure next in the series. There 
is a loss of the social surplus if the pleasure of consump- 
tion has not as a sequence an equally great pleasure of 
activity ; and a similar loss results if the energy when 
expended does not reappear in aesthetic forms and rela- 
tions of equal value as pleasures. A social surplus once 
created, therefore, should be a permanent possession of 
society, but never remaining in one form or in the pos- 
session of one person. Isolated pleasures represent 
either a loss to society or at least the suppression of 
a part of the surplus until the enjoyer throws it once 
more into the common fund by some form of activity. 
Enjoyment that does not inspire productive activity 
stops the process of transformation essential to the 
continuance of the social surplus. 

When labor is painful, a part of the surplus is de- 



44 The Theory of Prosperity 

stroyed, since the pain neutralizes an equal amount of 
pleasure. To this loss must be added that due to dis- 
sipation. From an economic standpoint dissipation 
includes every use of goods that does not result in the 
building up of the body, and thus fails to create a fund 
of surplus energy. Many utilities give satisfaction, but 
through overindulgence weaken instead of strengthen 
the system. The normal tendencies of society check 
these indulgences and so vary the consumption that each 
utility adds something to the vigor of the body, and to 
the motives that increase future activity. When this is 
not done, a part of the social surplus is destroyed, 
society is made poorer, and workers are forced back 
nearer the point of mere existence. The losses in these 
directions are further increased by every form of dis- 
ease. Only healthy bodies can transform utilities into 
surplus energy. Sickness, the lack of sanitation, leth- 
argy, or any form of imperfect assimilation lowers the 
vitality of workers even more promptly than does pain- 
ful work or dissipation. Where these evils are not 
avoided, much of the social surplus is used up. 

This waste of surplus is reduced by each step in the 
adaptation of men to external conditions. Inventions 
and discoveries make overwork unnecessary, while the 
greater variety of occupation reduces the need of so 
concentrating effort that it is painful. Through the 
elimination of the weak, and through a stricter adhe- 
sion to the moral code, dissipation becomes less tempt- 
ing. Morality puts a check on the use of goods for 
mere pleasure and favors their use in such ways that 
they reappear as energy. Moral rules often seem mere 
negations because they prevent dissipation; but to the 



Work and Pay 45 

degree that they check it they force men to be tem- 
perate in the use of goods, and thus create energy. 
Disease is also reduced in amount by the process of 
progressive adaptation. The transformation of food 
into nutriment is thus made more complete ; energy 
is increased and more of it is expended in production. 
The circle of change by which goods increase energy 
and energy is expended in making goods, becomes more 
perfect with each advance toward a normal life. The 
normal man has no losses from imperfect assimilation, 
dissipation, or disease. A surplus once created remains 
forever active, creating pleasure in each of its reappear- 
ing forms. 

When the working day and the motives for activity The wages 
are normal, costs have little to do with the fixins: of the f^"^°^^^^ 

° labor. 

rate of wages among free laborers. Most of their pains 
are not due to production, but to dissipation, disease, 
and other causes more closely connected with the 
period of rest and recreation than with the working 
hours. These evils have their sources in the homes 
of workmen, not in their workshops. Even if they 
suffer each day an amount of pain equal to their 
total enjoyment, there would still be a large surplus of 
pleasure from the period of production, because much 
of this pain is in no way connected with it. All man's 
pleasures have an economic origin ; most of his pains 
have not. There is thus a large surplus in the area of 
industrial activity. 

The prevailing theory of wages by emphasizing costs 
makes them the determining element in fixing wages. 
It is assumed that there is a downward pressure on each 
group of laborers, causing wages to fall until the laborers 



46 The Theory of Prosperity 

least skilful or least favorably situated are forced to 
the wall by their costs exceeding the value of what 
they produce. Each group has its rate of wages sus- 
tained by the ehmination of the weakest laborers. The 
better laborers have a differential advantage giving 
them a slight surplus, which they lose when more of 
the weak laborers are forced to the wall. The protec- 
tion of the strong thus lies in the presence of the weak. 

The rate of wages may, however, be protected by 
the advantages of the strong as well as by the costs 
of the weak. Free laborers have a choice of occupa- 
tions. To secure them in one industry, a wage must 
be offered equal to what they can get elsewhere. If 
no employer will give them this alternative, they can 
work for themselves. Under these conditions, wages 
are fixed by the option which exists of entering some 
other occupation. Any fall in the rate of wages in 
one industry causes some workmen to avail themselves 
of this option. The number of workmen in the first 
industry is thus reduced and the rate of wages restored. 
The movement from industry to industry that holds up 
the rate of wages is among the strong of each group. 
The weak members of the group may not possess this 
option, yet they will gain by the power of the latter to 
withdraw. The strong thus protect the weak instead 
of the reverse, as is maintained by the advocates of 
the cost theory of wages. 

To compare these theories, let a group of laborers 
be represented by the letters from A to Z, of which 
A is the strongest, Z the weakest. Let the other 
members be represented by the letters nearer to A if 
their strength approaches that of A, or nearer to Z as 



Work and Pay 



47 



their weakness approximates his. The series from 
A to Z would then show their relative strength and 
weakness. Assume also that in the diagram dis- 
tances from the line ad to ad represent the varying 
costs of these persons, increasing from that of A to Z, 
and that distances from ad to dc represent the re- 
turn in the alternate occupations open to them. The 
option of Z would be worth little to him, but A's option 
would be as valuable as his present position. 




FIG. V 



Under these conditions, a lowering of the rate of 
wages would cause the withdrawal of both A and Z. 
A would make use of his option, while Z would be 
forced to the wall. Either theory of wages might, then, 
be held to be true and to account for the facts. But 
if A's option is greater in amount than Z's costs, or 
Z's costs greater than A's option, only one of the 
theories would be correct. What, then, is A's option 
worth and how does it compare with Z's costs ? Plainly 
this is decided by the stage of civilization in which the 
workmen live. A's option increases in value and Z's 
costs decrease with every step in industrial progress, 
and in advanced societies the former exceeds the latter. 
Free laborers have valuable options, and their wages 



48 



The Theory of Prospejity 



are determined by the options of the strong in each 
industrial group. 

To show how A uses his option, let the value of the 
options of the members of two groups M and N be again 
represented by the distances between the hnes ab 
and cd. In group N the strongest member is A, who 
can remain where he is or enter group M. The induce- 
ment is not great enough to impel action so long as 
the difference in wages is only twenty cents, but any 
reduction of the wages of his group below one and a 
half dollars will cause him to enter the other group. 
A. z 



M 
$1.70 


FIG. V 

A "7 




^~^-^-->^__^ 


N 
$1.50 



The obstacle to the change may lie in the breaking up 
of pleasant social relations or in the need of saving so 
that he can prepare himself for the new occupation and 
secure the necessary tools or capital. He may also 
spend more on the education of his children and thus 
put them in the better occupation even if he cannot 
change himself. He would thus indirectly reduce the 
number of his class and help to restore their wages. 
Some of the strongest members of each class move up 
to better occupations, and their withdrawal or possible 
withdrawal keeps up the wages of the weaker members 
of their group. There is always a stream of progres- 
sive individuals working up from their present station. 



Work and Pay 49 

The descendants of each group move up to better posi- 
tions, leaving what their fathers had to those coming 
from lower groups. Even in the slums of great cities 
there are many who push up into better social condi- 
tions. While this movement continues it is the strong 
who protect the weak, and hold for them advantages 
that they could not secure for themselves. Z does not 
sink in the scale of existence because of A's monopoly, 
and his wages remain far above the costs he endures. 

There is a downward movement, but it is due to dissi- 
pation and not to costs. Some will indulge in vicious 
practices and thus destroy their industrial qualities; 
or they may be careless, and thus break down their 
health or destroy their family by a disregard of sanitary 
and other vital conditions. Disease and other dissipa- 
tion to some extent thus cut down the number in each 
group. They operate, however, to keep up rather than 
to cut down wages because men become careless and 
dissipated far above the point where their costs equal 
their total enjoyment. Men will also turn into tramps 
or live off their friends and relatives long before their 
costs destroy their surplus. The opportunities of the 
criminal, the tramp, and the pauper are too great to 
allow the wages of workmen to be forced to a minimum. 
They and other social dependents form the lower stra- 
tum of society and use an option of which those least 
fit for industrial enterprises can always avail themselves. 

The relative position of the different industrial groups 
is seen in Diagram VII, the line cd again determining 
the value of alternate occupations. In each group, A 
has an option of equal value to his present position. 
His wages cannot be forced down without causing his 



50 



The Theory of Prosperity 



withdrawal. The other members of the group thus get 
the wages A demands and have the same advantage 
from his option that he has. The movement is from 
the lower to the higher groups. The highest group 
has the greatest monopoly power and its members can 
the most readily protect themselves. Each lower 
group gets its protection from the group above it, to 
which its strongest members withdraw if their wages are 
depressed below the normal difference between the two 
groups. Every class thus has some option open to it, 



A^- 



-Z3 



M 


^2 


— Za 


FIG. VII 


N 


A.L _ 


__Zi 





A. z 




P 


d 
b 



and hence enjoys some monopoly power. The key 
to the situation, however, lies in the highest industrial 
class. So long as its members open up new opportuni- 
ties to labor and increase their incomes, every other 
class in a measure participates in their monopoly power 
and raises its rate of wages. The push of the energetic 
business man increases the monopoly power of every 
class below him. Wages are thus set by that portion 
of the world's workers having the least pains. The 
monopoly power of each group, gained through the 
options of its strongest members, is the sole determi- 
nant of wages and is the one thing for which laborers 
should seek. New options can do what no amount of 
effort in other directions can accomplish. 



CHAPTER II 

Monopoly Advantage 

Production is primarily a problem of values and Market 
wants. Each workman strives after an equilibrium P"^^^- 
between the outgo of energy and the return flow of 
goods. As wants increase in intensity, more energy is 
exerted, a better adjustment to nature is attained, and 
a greater quantity of goods comes back to the worker. 
While goods thus increase, wants increase more rapidly, 
leaving the consumer a margin of unsatisfied wants 
higher than before. Were the relations between men 
and nature constant, a solution of the problems of value 
would clear up all the difficulties of production. Every 
change in value would mean some alteration in the 
pressure of wants or in the relations of men to nature. 
All articles would thus go up in value with social prog- 
ress and fall together in decadent epochs. 

In contrast to these slow universal changes, problems 
of price are created by local disturbances affecting but 
a part of the industrial world. Some new obstacle to 
the increase of production is met in certain industries, 
and a larger relative share of the labor and capital 
must be moved into them. Improvements may also be 
made in other industries, thus liberating labor and 
capital. Each irregularity in the environment also 
causes the productive power of men to vary, and makes 
goods more or less abundant as the conjunction of these 

51 



52 The Theory of Prosperity 

accidental or temporary circumstances are more or less 
favorable. Fire, wind, flood, drought, and other natural 
and social phenomena affect the output of goods and 
alter from time to time their relative amounts. 

Because of these variations in supply, market prob- 
lems arise. Each producer having a deficit or a super- 
fluity of goods seeks a market to make up the one or 
to get rid of the other. All goods come to a market of 
which producers have a greater supply than of other 
commodities, and they get from a market articles they 
produce in less quantities than they need. Market rela- 
tions equate differences in the relative demand for 
goods, and thus determine price. The exchange of 
products depends upon two sets of estimates, — that of 
the buyer and that of the seller. Goods change hands 
many times before raw material is transformed into 
products fitted to supply consumers' needs. Each 
producer is a buyer of material from other producers 
and a seller of it to those who, between him and 
the consumer, work with the more finished products. 
He is thus a buyer in one set of relations and a seller 
in another. In the factory or on the farm he is the 
maker of particular goods. On the market, he, like 
every other producer, is a buyer and a seller ; his gains 
are determined by the excess of the price of what he 
sells above that of what he bought. Unless the seller 
is a mere speculator, he is always a producer, for he 
has transformed the commodity and in some way in- 
creased its utility. This may mean production in the 
sense that the qualities and form of goods are altered ; 
or it may mean their transportation to regions where 
they are rarer; or it may mean the holding of them 



Monopoly Advantage 



53 



until a time when they will have increased utility to 
consumers. The seller may have thus created a place 
value, a time value, or a form value, but, in any case, he 
has created value, and is a producer. We should think 
of him, therefore, as a seller and neglect his particular 
function in production, the details of the process being 
ignored to permit a concentration of interest on the 
phenomena of price. The result of these exchanges 
between buyers and sellers is expressed in money. 
While consumers think of their utility, sellers think 
only of their money gains, which are determined by the 
movement in prices. Market prices are thus objective 
ratios of exchange existing between different com- 
modities. The quantity of a good, and the different 
ratios of its exchange expressed in money, are the facts 
needed to determine its price under particular condi- 
tions. The causes fixing the price of a commodity can 
be illustrated by the following diagram. 



FIG. VIll 




Let the base line ab represent the quantity of the 
article, using the upright Hues to represent its price and 
its expense. If but one increment of commodity is 
produced, the expense is equal to the line ac, which 
increases with a greater production until the quantity 
ah is produced, when the expense is bd. If, on the 



54 The Theory of Prosperity 

other hand, but one increment of the commodity comes 
on the market, its price is ae. Additional quantities 
would lower the price to buyers until the quantity ab 
is produced, when the price falls to bd. On all the 
earlier increments there is a buyer's gain and a seller's 
gain in the exchange. At bd both these have disap- 
peared, and no further exchange takes place. This 
then becomes the normal price until the conditions of 
production or consumption are altered. 

For every commodity a diagram of this kind pictures 
the relations existing between sellers and buyers. 
Sellers have gains and expenses which are estimated in 
money. The gains are the difference between expense 
and the price of the article sold. Expense is the money 
price of that which is represented in terms of utility in 
Diagram III by the area abcf. The two diagrams repre- 
sent the same things, but from different points of view. 
Consumers reckon in utility, sellers in money ; both have 
in mind the same commodities, and their estimates, 
though made in different terms, must in the end 
correspond. 

To the seller also it is a matter of indifference 
whether expenses are costs or sacrifice to those with 
whom he is related as a producer. The seller pays the 
market price for the use of land, labor, and capital. The 
relative expense of each unit of commodity he brings on 
the market may be low, and yet he may have used the 
highest-priced land and labor. A large surplus to the 
landlords, capitalists, and laborers is consistent with 
large sellers' gains to the producer who uses their 
products or efforts. The cost of labor may be low and 
at the same time the relation of the laborers* costs to 



Monopoly Advantage 55 

their surplus may also be low. Or, to put the same fact 
in another way, the seller of a commodity may have low 
expenses at the same time that wages are high. Ex- 
pense is not, therefore, the same as cost. A large 
expense fund may mean low costs. 

The two diagrams (III and VIII), while similar in 
form, really represent a different group of facts and 
relations. The one represents the relations between 
producers and their environment. The better those 
relations, the larger the surplus and the lower the costs. 
The other represents the relations of buyers and sellers. 
This is at bottom a relation between the individual 
members of a society each striving to improve his 
relative position. On the market the loss of one 
person is the gain of another. When in contact with 
nature the advantage of each worker is an advantage to 
others. 

For the sake of clearness of thought the terms utility, 
value, surplus, and cost are used when the simple re- 
lations of wants to effort are referred to. In market 
relations, however, producers are buyers or sellers and 
are interested only in prices. Though they do not 
appear actively, the consumer and producer are the 
cause of market relations. From the moment effort 
is exerted in production until the consumer gets the 
finished goods, all exchanges are on a market, and all 
prices are money prices. Ignore all these intermediate 
steps through which goods go on their way from their 
makers to those who finally enjoy them, and only a 
group of subjective relations remains, such as those 
pictured in Diagram III. Subjective values treat of the 
ultimate relations of producers to consumers; market 



$6 The Theory of Prosperity 

prices are concerned with the movement of goods 
between them. The phenomena of price indicate a 
movement of commodities. Utility appears at con- 
sumption. 

The two points of view thus supplement each other, 
but must be kept distinct. The one view pictures the 
producer in contact with nature, absorbed in the pleas- 
ures and pains of production and consumption. The 
other view does not recognize the results of effort until 
goods are brought on a market ready to pass into the 
hands of another person, and are lost sight of again 
when withdrawn from the market by a person intending 
to use them. The first view presents a world like that 
of Crusoe, in which there is but one person, who is thus 
incapable of any but subjective relations. The second 
takes into account only a world of two or more persons, 
and then only of their mutual relations. The market 
world knows nothing of nature and the obstacles to the 
satisfaction of wants. A Crusoe world is equally oblivi- 
ous to market relations. 

It should be noticed that buyers' gain is not the same 
as the consumers' surplus, which is real while the former 
is only hypothetical. If a consumer uses two ounces of 
tea, the utility of the first ounce is greater than that of 
the second, and is a real utility for which he cannot be 
compelled to pay. For Hke reasons all of the con- 
sumers' surplus is a real fund of which the consumer 
cannot be deprived, except by conditions inducing him 
to cut down his use of the article. Buyers' gains do 
not represent real gain to individuals or to society, but 
show merely what would have been paid for an article 
under other conditions from those that exist. Assum- 



Monopoly Advantage 57 

ing that a thousand pounds of tea on a given market 
would sell for fifty cents a pound, and that two thousand 
pounds would sell for only forty cents a pound, it does 
not follow that the dealer would make ten cents a pound 
extra on the first thousand pounds if two thousand 
pounds were sold. He would sell all his tea at the same 
price and have the same gain on the second as on the 
first thousand pounds. The consumers, however, would 
have a real surplus on the first half of what they used. 
Buyers* gains represent only the effect of changes in 
supply on price, and form no part of the income of 
society. 

Nor is it true that there is a close connection between 
the consumers' surplus and the buyers' gain. The latter 
could not be high in cases of deficient supply, unless the 
former was also high. The market price of an article 
cannot be forced above its utility to the consumer. But 
it does not follow from this that the price of a rare article 
can be forced up until the consumer has no surplus. 
Usually the consumer has a power of substitution 
through which the upward movement in price is 
checked long before his surplus is exhausted. The 
user of tea can also drink coffee or cocoa. The maxi- 
mum price of tea, therefore, is fixed at the point where 
he will change over from tea to coffee or cocoa. Were 
the power of substitution complete, that is, could the 
consumer enjoy the three articles equally, there would 
be no buyers' gain, because the price of no one of the 
articles could be forced up without destroying its sale. 
So the buyers' gain measures not the consumers' sur- 
plus, but the incompleteness of his power of substitution. 
Under ordinary conditions the former is but a fraction 



58 The Theory of Prosperity 

of the latter, and always follows different laws. With- 
out confusing the fundamental relations that make the 
distinction of subjective and objective values important, 
the two cannot be thought of as one or as depending 
on the same conditions. Clearness of thought demands 
the use of distinct terms to express contrasted groups 
of ideas. 

If prices are sustained, some clearly defined obstacle 
to their fall exists ; if they fall, some definite force must 
be in action. What are these two forces, the equilibrium 
of which fixes price, and how do they operate } If 
prices are kept up by the presence of costs they must 
fall until the value of goods does not exceed their cost 
of production. This lowest point is also normally the 
highest, because when producers compete with pro- 
ducers, the power of underselling is the test of industrial 
efficiency. Prices gradually fall until a further reduction 
is stopped by the cost of production becoming equal to 
the value of the goods produced. Competition of pro- 
ducers is thus the effective force reducing values, while 
costs are the obstacles that sustain them. The two 
forces acting together bring about an equilibrium that 
determines what consumers must pay for goods under 
normal conditions. If prices must gradually fall so long 
as progress reduces costs, the gains of consumers are the 
measure of progress, and to them come all the benefits 
of improved processes. If costs disappear through a 
complete adjustment of man to nature, values would also 
disappear. There would then be no obstacle to their 
downward movement. The goal of progress is thus 
the elimination of values and the creation of a social 
state in which all goods are free. 



Monopoly Advantage 59 

This doctrine is attractive, but I doubt if it can be 
maintained. In some way prices are held up, and 
consumers deprived of the benefits of better methods 
of production. It is also plain that enormous profits 
are made by certain producers, and that they divert to 
themselves the surplus that theoretically should go to 
consumers. Even without monopolizing corporations this 
tendency can be seen ; and in the fields where they 
control production an actual rise in price often occurs. 
Either the motives of producers are incorrectly ana- 
lyzed, or at present some abnormal tendency is domi- 
nant in industry. I think we must accept the first 
alternative. The condition of production and motives 
of producers are more normal than ever before, and can 
be better seen than during any earlier period. Instead 
of there being any Hkelihood of a return to the condi- 
tions of past production, new forces are steadily becom- 
ing more pronounced, the nature and effects of which 
admit of easy analysis and prediction. 

The adherence to the old theory of value is not to be 
accounted for by its harmony with the facts of to-day, 
but rather by the incapacity of men to conceive any 
other adequate theory. It can be seen how costs stop 
the fall in value, and also how the competition of pro- 
ducers lowers prices ; but it is not realized how other 
forces may bring about the same result. A new 
theory of prices must show a force that lowers and an- 
other that sustains them. Can such forces be found 
which, in scope of operations, shall be general and 
adequate, and at the same time in tendencies and results 
shall harmonize with the known facts about industry } 
A reply to these questions is possible, or at least can 



6o The Theory of Prosperity 

be attempted with some hope of success, if the point 
of view is shifted from that of the producer to that 
of the consumer. 

The old theory assumes a passive consumer wanting 
certain goods supplied by a given group of producers. 
If prices tend to fall through the action of producers, 
consumers gain nothing by activity ; all the benefits of 
improved production come to them through no effort 
of their own. But if the motives of producers do 
not lead them to compete with one another by lowering 
prices, have the consumers any remedy ? Yes, through 
the power of substitution. The consumer has innu- 
merable wants, many of which have about the same 
intensity. Any upward movement in the price of a 
particular good is met by the shifting of the consump- 
tion to other goods supplying the same want, or by 
the development of new wants demanding other goods 
for their satisfaction. If the price of beef rises, the 
consumer may eat more mutton and pork, or he may 
forego meat entirely and eat more bread and vegetables. 
If cotton goods rise, more woollens are bought ; if coal 
oil becomes costly, people use gas and electricity ; if 
lumber becomes expensive, builders resort to brick and 
iron. The consumer finds substitutes to which he may 
turn when the producer seeks to take an advantage of 
him. 

There is thus exerted on prices a steady downward 
pressure which producers cannot counteract. Even 
powerful trusts, finding their monopoly curtailed by the 
consumers' power of substitution, must be active in 
watching the action of consumers, or a large part of 
their trade and profits disappears. The force that 



Monopoly Advantage 6 1 

lowers prices lies in the consumer. It is his power of 
substitution that fixes the lower Umit of price. If the 
consumer has no power of substitution, prices will be 
high no matter how low costs are, and they will move 
up until the power of substitution becomes effective. 
Instances of this were apparent, even at the time of 
the classical economists. The price of food was high 
in England for the century from 1770 to 1870. Con- 
sumers could not, under the prevailing conditions, 
secure a fitting substitute for wheat bread. Not until 
after 1870 did foreign commerce furnish substitutes for 
the traditional food in sufficient quantities to create 
an effective option. Then all prices of food fell and a 
lower normal level was secured through the increased 
power of substitution. With a multitude of new ar- 
ticles of food pouring into the EngUsh market, no one 
kind can be raised in price without a change of con- 
sumption to other foods. 

It is this power that protects the consumer, and not 
the rivalry among producers. The price of meat is 
lowered, not by competition of producers, but by the 
cheapness of its substitutes. In so far as producers 
compete, it is a competition between the producers of 
different articles capable of supplying the same want. 
The consumers' power of choice makes this competition 
effective. There is no force operating entirely in one 
group of producers to bring this result to a passive 
consumer. Unless he is active, high prices are forced 
upon him by those upon whom he has become accus- 
tomed to depend. 

In the consumer also Hes the ultimate cause of rising 
prices. Wants are multiplying more rapidly than the 



62 The Theory of Prosperity 

power to supply them, and each step in the advance 
of civiHzation increases the number of wants and the 
intensity of their satisfaction. The consumer is forced 
to leave unsatisfied the least urgent of his older wants 
in order to secure a more complete satisfaction of newer 
wants. With each of the older wants the marginal 
gratification is foregone, so that the income employed 
in purchasing the goods that satisfy them may be used 
in some new direction. The margin of consumption rises 
as a result, and thus the value of all goods is forced up. 
Against this change the consumer has no protection, 
for he must seek the greatest satisfaction, and this is 
obtained, in spite of the rise of values, in the gratification 
of the newer and intenser wants. Higher values form 
a necessary reduction in his welfare as a consumer, but 
this reduction is more than compensated for by the 
greater satisfaction of the new Hfe. Total utiHties 
increase and total values increase with them ; the only 
reduction is in the consumer's surplus. To recover 
this loss the individual consumer must improve his 
position as a producer. This he can do by changing 
his production from the older articles giving less in- 
tense satisfaction to the newer and more urgently 
demanded goods. Capital is withdrawn from marginal 
production and employed in making goods giving more 
satisfaction. The return on capital and the rate of 
wages are thus increased, while the pressure of more 
urgent wants compels men to forego the gratifica- 
tion of the less intense wants at their former margin 
of consumption. 

Active producers thus get a reward more than recoup- 
ing them for the higher prices they pay as consumers. 



Monopoly Advantage 6l 

The tendencies of active producers and active consumers 
harmonize. They both avoid the old marginal goods, 
and get as a result a higher reward and an intenser 
satisfaction. Only the sluggish producers continue 
selling the older articles at a lower price. In the end 
they also see the uselessness of this endeavor and 
adjust themselves to the new situation. The steady 
pressure on producers does not lead them to stick by 
old forms of production through a lowering of price. 
On the contrary, their dominant motives pull them 
away from competition into the production of new 
articles for which the demand is more urgent. This 
withdrawal of the more active producers into new forms 
of industry creates a new equilibrium. 

Capital and labor can be put to better uses with 
every improvement in the variety, harmony and inten- 
sity of consumption. Direct competition at the margin 
of production is thus avoided. Although the total pro- 
duction of goods is increased, the reduced supply of 
each good causes values to rise, so that the position of 
all producers is improved. The dominant motives 
among producers lead to withdrawal from competition, 
and not to an increase in its intensity. There is, there- 
fore, no enduring tendency forcing values down to costs. 
On the contrary, values move away from costs, and in 
a progressive society continue to rise in spite of the 
decline in costs. Downward movements in price come 
through an increased power of substitution affecting 
particular articles, and upward movements come through 
the increased intensity of particular wants. Every 
change in price depends on some alteration in the 
relative strength of these two forces. Costs lose their 



64 The Theory of Prosperity 

power to fix prices with the increase of industrial 
efficiency. 

Because of the confusion existing in the use of terms, 
the elements that enter into price have not been dis- 
tinguished from those that influence value. To get 
simpHcity and stability of conditions, the elements of 
price that are peculiar to markets have been eliminated 
as transient, leaving as the enduring elements only the 
subjective influences that determine value. Cost and 
sacrifice, therefore, seem to be the sole elements in 
normal price. 

For an isolated producer this analysis is correct, but 
he would have no price problem. All his relations 
would be with some local situation. He would work so 
long as the costs and sacrifices of this direct contact 
with nature were less than the utility of the goods re- 
ceived in return. These costs and sacrifices determining 
subjective value help also to fix market price, but prices 
in a market have some elements that do not enter into a 
Crusoe world. As soon as exchanges permit the rise 
of social relations, the relative advantages of different 
locations and occupations have an influence on pro- 
ducers. Each worker must be paid for his labor the 
price that the best of his options to work will give. If 
he can work in Vermont or Iowa, if he can raise corn 
or wheat, if he can be a farmer or a mechanic, he has 
an option of place, product, or calling that will increase 
his wages above the return he would get as an isolated 
producer in some local situation. 

Differential costs are also unknown to isolated pro- 
ducers. If two farms, one producing twenty bushels 
and the other twenty-five bushels to the acre, send their 



Monopoly Advantage 65 

produce to the same market, the price of grain must be 
high enough to compensate the workman on the poorer 
land. No price element of this kind would enter if the 
two farmers were isolated producers. Their subjective 
equilibrium would then have no elements but cost and 
sacrifice. Differential cost and optional advantage are, 
therefore, elements in market price that are absent from 
the simple relations of a Crusoe world. 

Risk is a third element that appears only in a market. 
The isolated producer is in direct contact with nature, 
and bases his calculations on conditions in view and 
under control. He deals with realities, and thus avoids 
the uncertainties of market relations. As soon as a 
market is estabhshed a multitude of uncertain elements 
enter the situation, against which the producers must 
guard themselves by price changes. They will demand 
an extra return equal to these disadvantages. The 
buyer in a market must, therefore, pay higher prices 
than if he were an isolated producer. Expressed in 
subjective terms this means that those going to a market 
have a higher margin of production and consumption 
than if they were isolated producers. If they consume 
more goods than they would living in isolation, it is due 
to their greater productive power, which enables them 
to pay more and yet have a greater quantity of goods. 
The supply line would cross the demand line at a higher 
point, but the demand line is so much raised by the 
added productivity of market relations that the new 
equilibrium involves a greater production of goods than 
before. 

Cost and sacrifice are permanent elements running 
through the whole industrial world, but they affect 



66 



The Theory of Prosperity 



values only and never cause price movements. Differ- 
ential cost, optional advantage and risk may be greater 
or less and may affect some producers more than others. 
They are the pure price elements and the cause of price 
variations. Their sum is the sum of possible price 
variations, and shows the amount of income that can be 
transferred by price movements. When pictured in a 
diagram the price of goods in a market would have the 
following elements. 



FIG. IX 




Speculators differ from producers in that they return 
the goods they buy to the same market from which the 
goods were taken. A producer buys in one market and 
sells in another ; one buying wool sells cloth, another 
buying grain sells flour, a third buying leather sells 
shoes. Producers not changing the form of goods at 
least change their place or alter their time relations. 
The shipper of goods from regions where they are 
abundant to places where they are rare is as much 
a producer as he who made them. So is he who sup- 



Monopoly Advantage 6y 

plies the deficit of one season out of the abundance 
of another. But none of these useful offices is 
performed by the speculator. His income does not 
depend on the increase of goods or utilities. The 
amount changing hands through speculation exceeds 
the income of the speculators, but there is a net balance 
in their favor that comes in some way from the annual 
produce. No one lives and consumes except as he has 
a claim on the product of industry. And a share of 
this product comes to no one except by a movement in 
prices. To this law speculators are no exception. They 
must have some power over prices or take advantage of 
some price-making conditions. 

The index of speculation is the presence of a margin 
between the buyers' and sellers' price on the same 
market. The cause of this margin is the instability of 
prices or some waste of productive forces. Wherever 
prices fluctuate the buying public pays for the goods it 
takes from a market at the upper limit of price, while 
those who sell on the market only receive the lower 
limit. If goods are in danger of burning or may be 
damaged in transit from one market to another; if 
dealers are dishonest or incompetent; if war, storm, or 
disaster can hinder the making or transfer of goods ; if 
laws and taxation cannot be foreseen ; if the lives of 
producers are in danger, or if the rightful enjoyment of 
income is made uncertain, a margin in prices is created 
and a flow of income started in which producers do not 
share. Stable prices reduce speculation, and turn in 
some other direction the flow of the income due to 
uncertainty. It matters not whether prices are high 
or low, steady prices cut in on the gains of speculators, 



6S The Theory of Prosperity 

and with regular conditions the margin of price within 
each market disappears. 

The flow of income due to instability of conditions 
makes changes in prices by depressing the value of 
future goods. Future goods have a less value, unit for 
unit, than present goods ; and as they ripen into present 
goods, their value gradually increases until in the final 
stage the difference disappears. The increase of value 
as the transformation goes on is the cause of the income 
to which the name interest is given. If any risk or un- 
certainty exists in production, the value of future goods 
starts at a lower point than it would if only interest were 
paid. Suppose that the values of present and future 
goods must differ by twelve per cent to induce capital- 
ists to invest. If there is risk, the difference in value 
between the two kinds of goods will be made greater. 
Instead of future goods starting at eighty-eight per cent 
of the value of the present goods produced, they would 
start at, say, eighty per cent of the price of the finished 
product. If the timber used in making a house is ten 
per cent less in value than the finished wood in it 
because of the rate of interest, it will start at eighty-five 
per cent of this final value if the danger from fire is 
five per cent of the value of the house. When the 
price of steel wares is uncertain, the material used in 
making them and the capital goods used up will have 
a lower value than if no risk existed. Any instability 
in the price of grain or meat does not raise the price 
to the consumer : it lowers the price to the farmer. All 
the effect of insecurity is shown in the lower value of 
future goods that finally ripen into present goods. This 
margin between raw products and finished goods is the 



Monopoly Advantage 69 

source of the fund from which speculators draw their 
income. It is an income that is not interest or wages, 
although it acts on prices in the same way as interest. 

Many social institutions aim to eliminate this risk, or 
to prevent the individual producer from suffering un- 
certainty in his return. Insurance on life or against fire 
does not make fire or death less frequent. It merely 
prevents individuals from feeling too severely the bur- 
den of these evils. Where inflammable goods are used, 
the material out of which they are made starts at a 
lower value. The flow of income thus created is by in- 
surance transferred from the individual owners of goods 
to the insurance company. A bank giving security to 
its depositors gets in return the income which otherwise 
would go to the possessors of money, but which would 
be of no importance to them because their losses 
through risks would offset this additional income. 

A railroad company substituting stable high rates 
for fluctuating rates does not get the income of any 
individual using the road. So long as the rates are 
unstable, the prices at which future goods started in the 
process of ripening into present goods must be so low 
that the possible high rate of transportation can be paid. 
Stable high rates absorb the fund that would in any 
case be lost to the public by this lower value of future 
goods. So long as the rates remain unstable, certain in- 
dividuals from time to time gain by the reduced cost of 
transportation. But this is for them a specific gain, 
in which the public does not share. These gains re- 
semble rent and do not cause their possessors to bid 
higher for future goods and thus transfer the gain from 
them to the pubhc. The initial efforts in production 



70 The Theory of Prosperity 

by which future goods are created are paid no more 
highly if individuals gain through occasional lower rates 
than if the railroad company gets a larger sum through 
stable rates. 

When the methods for making prices stable used by 
banks, insurance companies, railways, and industrial 
trusts are compared with those earlier in vogue, the 
difference, it is seen, does not consist in any change in 
the prices of goods upon which the public welfare de- 
pends. Neither interest nor wages are altered. These 
corporations get the margin between future and present 
goods from which speculators formerly derived their 
income. A part of the public was interested in this 
margin because production could not be carried on 
without speculation. Early producers trusted to the 
speculative gains connected with their industry more 
than to its regular returns. But this fact caused many 
ill-directed efforts through which much of the margin 
of speculation was wasted or destroyed. Where specu- 
lation is dominant, little or no net gains persist to im- 
prove society. Through the larger organizations of 
the present time, the flow of income caused by the 
margin of speculation is funded and becomes a part of 
the regular income of society. There is thus a social 
gain quite as marked as if some new invention had been 
introduced. A funded income saved by making prices 
stable is quite as effective as an invention in increasing 
the income available for steady enjoyment. Increased 
security is a net gain adding to the revenues of 
those who create it without taking anything from the 
public. 

If, as has been shown, the downward movement in 



Monopoly Advantage 71 

prices is due, not to the competition of producers, but Competition 
to the power of substitution possessed by consumers, ^^"^^^s^ 

monopoly. 

if superior producers withdraw from competition by 
producing articles supplying more intense wants, if 
the monopoly powers of the various producers differ 
radically, the principle of free competition seems to be 
set aside. Nevertheless, the assumption of free compe- 
tition is necessary, not to account for low prices, but to 
make sure that the ordinary motives for production are 
in operation. When producers are free, they place 
themselves at those points where their efforts create 
the largest product. Natural resources are thus made 
the best use of ; each man finds his most suitable place 
in the field of production, and consumers are enabled 
to satisfy their most intense wants. The theory of 
competition expresses in the simplest way the assump- 
tion on which economists agree, and through which 
intricate discussions of the motives, differences, and 
peculiarities of men are avoided. 

These facts associated with the theory of competi- 
tion, however, are not disturbed by causes that fix the 
price level at some other point than the cost of produc- 
tion. The monopolist has motives similar to those of 
competing producers. He must use the best machinery, 
place his factories in the most favored locations, and 
see that his workmen are placed where their efforts 
are most effective. A railroad corporation, for exam- 
ple, has men employed in many different occupations. 
The tracks must be kept in order ; the locomotives and 
cars must be repaired; switchmen and traffic agents 
must be employed ; the trains must be properly 
manned ; and the offices must be supplied with clerks 



72 The Theory of Prosperity 

and managers. The company loses if the relative 
number of any of these groups of workers is too large 
or too small. Even if it be assumed that a profit is 
made on every act of these men, a wrong disposition 
of them would reduce the profit below the attainable. 
There is a marginal use of men in each group of 
workers — some employee who would be discharged if 
the force were reduced. This marginal use should 
be the same in each kind of work. The last track- 
hand should yield the same net profit to the company 
as the last switchman or the last clerk. If this is not 
true, there is a loss that could have been avoided. 
There is thus an effective competition, but it is not a 
competition of men for places or of producers for 
cheapness, but of position with position. The least 
productive positions are always on terms of equality, 
and there is a shifting of men from one to another as 
each in turn sinks below or rises above the marginal 
level. No matter how close the monopoly or how far 
above the lower limit prices are held, there is a com- 
petitive level to which the prices of marginal products 
tend and by which all other prices are measured. 
Every monopoly has some men employed in positions 
that yield the same net return as do the exposed 
industries with no monopoly. These marginal posi- 
tions in all industries fix the competitive level of prices. 
If in any occupation prices fall below this level, work- 
men will be withdrawn and put to work in positions 
where the marginal level is higher. The most efficient 
positions are always occupied whether production is 
monopolized or not.^ If there is any difference, the 
right man is put in the right place, and the best loca- 



Monopoly Advantage 73 

tions for an industry are more often selected under 
monopoly than under free competition. The greater 
inteUigence of the managers of monopolies insures 
these ends more fully than if each man sought a 
place for himself and relied on his individual efforts 
to find it. The errors in judgment are thus elimi- 
nated and a better guaranty furnished than if the 
forces are made effective for which free competition 
is sought. There is nothing arbitrary about monopoly 
or any natural high level of prices. They imply 
intenser activity and more normal conditions than any 
system of competition has thus far furnished. 

In his relation to the consumer the monopolist must 
also promote the normal tendencies sought for under 
competition. He loses more than the consumer if the 
less intense instead of the more intense wants are sat- 
isfied. Consumers being under the influence of custom 
and habit are apt to hold to old forms of consumption 
long after it is possible to displace them by goods more 
suitable for the desired ends. Every more intense 
want that the monopolist arouses gives him a greater 
hold over his public by limiting their power of substi- 
tution. New wants demand particular goods only to 
be had from the monopoly ; old wants may be supplied 
in many ways. The judgment of monopolists is 
superior both to the producer and to the consumer. He 
brings in no new tendency, but merely realizes more 
fully those ends sought for under free competition. 
Every one is brought more nearly to the normal line 
both of wants and activities. The regularity of life 
and the power of predicting events and results are thus 
increased, and all parts of society become more pro- 



74 The Theory of Prosperity 

gressive than they would be if the conflicting motives 
of the less efficient but more numerous classes were 
allowed to dominate society. Monopoly is bad, but 
the confusion of ignorance is worse. 

The use of each agent in production is also competed 
for just as it would be under free competition. Some 
of the articles made by each monopoly are sold at this 
price. When the price of wheat was high in England 
many varieties of farm produce had their value at the 
competitive level. Once in four years an EngHsh 
farmer could get a paying crop of wheat from his land. 
In the meantime root crops and other cheap foods were 
raised at an expense equalling their value. In all mo- 
nopolies there are by-products giving only ordinary busi- 
ness returns, and these fix the level from which are 
measured the extraordinary profits obtained from the 
fully monopolized articles. This competitive level may 
be disguised under peculiar forms, but it is always pres- 
ent to guide the distribution of labor and the selection 
of the more advantageous situations in which labor may 
be employed. In periods of rising prices the strain of 
competition is as real as in periods of depression, and 
more effective, for the margin of wants and the margin 
of efficiency are then matched more carefully, and the 
normal equilibrium is more fully attained. 

Differential advantage is based on the presence in 
each industry of marginal producers with high ex- 
penses. A fall in price is checked by their withdrawal. 
A rise in price is prevented by their increased activity. 
Prices are thus kept stable by marginal producers. No 
marked or enduring change can take place so long as 
a number of them are present and active. The em- 



Monopoly Advantage 75 

phasis of this doctrine is, at least partly, the result 
of the social views and prejudices of writers who 
as statesmen and reformers desire to cast imputation 
upon particular forms of income, or they may be desir- 
ous of defending other forms. When rent was proved 
to be a differential, it was shown to be an unearned 
income. As the landlords of England were in politi- 
cal control of the nation, their position could be more 
effectively attacked if they were viewed as drones 
consuming what they did not earn than if the political 
principles for which they stood were questioned. The 
thought of confiscating rent comes up inevitably as 
soon as rent is regarded as a differential, and Henry 
George's position is the logical outcome of its emphasis. 
It is not probable that George would have magnified its 
importance if he had not desired to get a moral support 
for confiscation. 

Similar social influences lie back of the more recent 
development of the doctrine. But it is the defenders 
of the present social order who in recent times have 
extended the field and emphasized the importance of 
differential advantage. Senior claimed that interest 
was due to the pain of abstinence. When, however, 
immense sums of wealth were concentrated in the 
hands of a few persons, reformers asked. How does a 
millionaire suffer to the amount his income would in- 
dicate } The defence is now shifted by advancing the 
doctrine of differential advantage. Not the rich man, 
it is said, but the small capitalist, has a cost equal to 
his income, and if the rate of interest is lowered, he 
will be crushed out. The opponent of interest is thus 
put in the position of antagonizing the welfare of the 



'j6 The Theory of Prosperity 

small capitalists. It is then assumed that the good of 
the small holder is that of the nation, and thus the income 
of the millionaire is justified by showing that it comes 
from general conditions upon which national progress 
depends. The similar justification can be found in the 
differential advantage of producers. The man who 
makes a fortune does so because his expenses are less 
than those of other producers, and prices must be high 
enough to pay their expenses. The public, therefore, 
suffer no loss from the rapid creation of wealth by 
favored producers. So long as the gains of the wealthy 
are price-produced and not price-producing, it is held 
that no one can rightly complain of their increased 
income. 

So both conservatives and radicals find it to their 
interest to emphasize differential advantage, and by 
their joint influence its importance has been exagger- 
ated beyond anything the facts warrant. Their reason- 
ing has a solid basis only when the law of decreasing 
returns is in operation. Marginal expenses are no bar to 
a permanent fall in prices if the industry yields increas- 
ing returns in response to efficient applications of labor 
and capital. The high marginal expenses of producers 
under these conditions result from their individual pecul- 
iarities. When the pressure of downward prices comes, 
they must improve their methods of production or be 
permanently displaced. Falling prices force the more 
efficient producers to increase their output in order to 
get the same total profit with a smaller return on each 
unit of commodity. The market being thus supplied 
by better producers, the old marginal producers are 
permanently displaced. 



Monopoly Advantage *j'j 

If the price of some goods is raised, the consumer 
can force down the price of other goods, even though 
they have a high marginal expense. When the goods 
of the first class rise in price, they absorb more of the 
consumer's income and he is compelled to retrench in 
the use of the second class of goods, and the reduced 
demand for them lowers their price and forces out 
the marginal producers. When, then, the price of a 
given article falls because some other article or articles 
have risen in price, three causes operate to produce a 
lower permanent price: the marginal producers seek 
to improve their methods of production ; the more effi- 
cient intermarginal producers seek to increase their pro- 
duction so as to restore their former profits by larger 
sales at the lower rate of profit ; and at the same time 
the consumers check their use of it so as to have more 
of the goods which have gone up in price. A cheap- 
ening article tends to fall further, and an article rising 
in price has its rise strengthened by the forces making 
the other article fall in price. 

The view that high marginal expenses check the 
downward movement of prices has been acquired in 
fields where the law of decreasing returns is in opera- 
tion. Food was assumed to be the one natural mo- 
nopoly, and was therefore the one commodity that rose 
in price. As opposed to it, all other articles were 
assumed to fall in price, and to be produced at a lower 
rate of profits. This reasoning fails as soon as two 
or more monopolies contest with each other for the 
monopoly fund. High marginal expenses will protect 
a monopoly against industries under free competition, 
but they will not protect one monopoly against another. 



78 The Theory of Prosperity 

With the rise of a stronger monopoly each weaker 
monopoly loses some of its relative advantage, and the 
price of its articles goes down, no matter what its mar- 
ginal expenses of production are. Some sugar may, 
for example, be refined at a high cost, and yet this 
fact will not prevent a fall in the price of sugar if its 
monopoly advantage is reduced. The marginal pro- 
ducers of steel, oil, coal, or whiskey are equally helpless 
against falling prices caused by stronger combinations. 
The monopoly fund can be shifted to other indus- 
tries in spite of their exertions to protect themselves. 
So, too, farmers are helpless against the stronger mo- 
nopolies that come between them and the consuming 
public. The price of wheat, corn, cotton, beef, and 
pork can be kept below its natural level through com- 
binations among the buyers of farm produce without 
the marginal producers being able to protect them- 
selves. They share in the common loss, and must pro- 
duce below cost or improve their methods. Railroads 
also cut in on the price of farm produce without driving 
marginal land out of use. Land monopohsts are safe 
enough when their only relations are with the public, 
but their power is quickly broken when they contend 
with stronger monopohsts. There is no protection 
against the grinding force of a rising monopoly. Mar- 
ginal expenses are as frail a barrier to a fall in price 
as any other. No obstacle can prevent a shifting of 
income with a change of monopoly power. 

It was long assumed that the price of food was 
upheld by the high marginal cost of production on 
land. For over a century the price of food tended to 
rise, and thus it seemed that its high price was due to 



Monopoly Advantage ^g 

marginal expenses. Since 1873, however, the theory- 
has been put to the test. The price of food has fallen 
sharply, often to less than half its former amount, and 
yet little or no land has gone out of cultivation. Even 
if in a few cases land went out of use because of lower 
prices, the area of this land was too small to restrain 
the fall. When the downward pressure was felt, it 
was the good lands, not the poor, that set the price. 
The owners of farms formerly esteemed poor land 
were compelled to accept prices fixed by the produc- 
tive power of better lands, or to change their use so as 
to avoid the stress of competition. Mere withdrawal 
of poorer lands was not enough to stop the downward 
movement of prices before the level set by the better 
land was reached. The lower limit of the price of 
food is fixed by the mass of better land, and not by 
the relatively little poorer land. 

The same fact is shown in other industries when a 
downward tendency in price sets in. The marginal 
producers are powerless to stem the tide. Prices con- 
tinue to fall until the best producers are so affected 
that they curtail their output. A new level of price 
is thus created which holds until the general con- 
ditions of the trade improve. Some of the producers 
avoid competition by changing the nature of their 
industry, others adopt the methods of their more 
successful rivals, while still others strive for new 
inventions, or seek to utilize more fully the peculiar 
advantages of their locality. In these and other ways 
the lower level of price tends to become permanent, or 
at least a higher level is not restored until the old 
marginal producers are out of the way. Few indeed 



8o The Theory of Prosperity 

are the producers having protection against other makers 
of the same goods. Price fluctuations are frequent and 
severe, and will remain so, unless a new cause of stability 
comes from the consumer. 

In primitive times consumers were compelled to 
satisfy each want in one way. Food meant rice, wheat, 
beef, or potatoes ; clothing was made of wool, cotton, or 
leather, and other wants were satisfied in an equally nar- 
row manner by one group of producers. An increasing 
variety in consumption breaks up this power of par- 
ticular commodities and particular producers over con- 
sumers. Where wants can be- satisfied in a number of 
ways, consumers change from one commodity to others 
if its relative price rises. Instead of thinking in terms 
of concrete goods, they have for each want a unit of 
supply made up of the various articles that satisfy it. In 
the unit of food needed for a dinner, twenty different 
articles may be possible ingredients ; many varieties of 
clothing will keep a man warm, and he can be com- 
fortable in many different styles of houses and in many 
different localities, 
ice-deter- Among the various articles supplying a given want, 
nmg units g^j^g ^^^ jg price-determining, the others having their 
price fixed by it. The more costly portion of the supply 
has its price fixed by conditions of the industry that fur- 
nishes it. If this price is stable, the prices of all the 
units of supply are equally stable. The industries that 
produce them are protected so long as the industry 
having the price-determining unit of supply with- 
stands the pressure of price fluctuations. It alone is 
exposed to the vicissitudes of the market. Industries 
are, therefore, protected from competition or exposed 



Monopoly Advantage 8i 

to it, according as their products are price-determined 
or price-determining. There can be only one exposed 
industry among the group of industries that satisfy in 
various ways any given want; all the other industries 
have prices higher than the natural price, and have 
stable conditions of production so long as this exposed 
industry successfully withstands the pressure of com- 
petition. 

Each good has a definite expense of production which 
is the same for all its units, and yet it is one of a series 
of goods supplying a single want. There may thus be an 
extra profit on each of its units, because some other 
commodity supplying this want is the price-determining 
element of the supply. At the same time, if all these 
commodities are viewed abstractly as units of supply 
for a given want, they form a differential with one 
price-determining unit. Each kind of good has the 
same expense of production and yields an equal profit 
on all its parts, and yet its price has stable conditions 
because it is a part of an abstract unit of supply with 
one price-determining unit. The gain on each unit is 
thus marginal, if it is compared with other units of the 
same kind, but differential if it is compared witfi all the 
various units for supplying this want. Rent and profit 
are thus one fund viewed in different ways. On the 
price-determining commodities with less stability of 
price, the income is profits, while the same income 
becomes rent if the price is stable because price- 
determined. There may be a marginal rent if the 
income from a single commodity is considered by itself, 
but it becomes a differential rent if all the units of 
supply for a given want are taken into account. Rent 

G 



82 The Theory of Prosperity 

is profits made stable through its relation to the smaller 
profits on some competing commodity. Profits, on the 
other hand, are rent made unstable through the absence 
of a dearer price-determining unit of supply. These 
conditions create a permanent monopoly fund, the 
causes of which must be further analyzed. 

Prices are lowered by the consumer's power of sub- 
stitution and are raised by the pressure of new wants. 
Of the total utility of his goods the consumer must 
hand over the equivalent for their value to the producer. 
This value is determined by the margin of consump- 
tion through which the marginal utility of each good is 
fixed. The difference between the total value of the 
goods consumed and the total utility is the only utility 
the consumers get free. The total value of goods is 
the share going to producers. One part of this is a 
compensation for their costs, and the other is the pro- 
ducer's surplus. 

To make plain its origin the producer's surplus must 
be divided into two parts. Some of it is due to fixed 
charges that under existing conditions cannot be altered. 
Another part has its distribution changed or partially 
changed by price movements. The part of which the 
distribution cannot be altered without some radical 
modification in the structure of society is the fixed 
income of the different producers. The other part, 
transferred from one group of producers to others by 
changes in prices, is the free income. It goes to the 
producers, not because they have productive power, but 
because they control prices. Some of the producer's 
surplus represents the advantages resulting from differ- 
ential costs. The better land, the more efficient em- 



Monopoly Advantage 83 

ployers, and the superior workmen get a differential 
gain that cannot be taken from them by competition. 
Payments for interest represent a fixed charge not to 
be reduced until the motives for saving are increased. 
The standard of life also sets a definite limit to the 
downward movement of prices long before the cost line 
is reached. Laborers thus share in the surplus along 
with capitalists and the recipients of differential gains. 
These elements change from time to time, but in a 
given period they interpose a definite barrier to down- 
ward tendencies of prices. The rise and fall of prices 
can cause the free income to change hands, but it can 
do no more. A reaction toward higher prices sets in 
as soon as all the fixed charges are not met. 

These fixed charges are compensations for the imme- 
diate pains of producers and for the use of the endur- 
ing elements in production. Land will not be fully 
used, capital will not be replaced, nor will the number 
and energy of laborers be kept up unless the customary 
rewards are forthcoming. The compensation for the 
use of the enduring agents is the result of long-standing 
forces that cannot be altered by the pressure of falling 
prices, but which make barriers as stable as the structure 
of society, and can be removed only in a decadent civ- 
ilization. In a society with an increasing power of pro- 
duction there is no danger of their being reduced in 
amount. 

While these fixed charges will be readily recognized, 
the existence of free income is more open to dispute. 
Yet if one perceives that prices are always subject to 
change, he must also see that there is a fund capable of 
being transferred without any cutting into the fixed 



84 The Theory of Prosperity 

charges. This movable income is due to the fact that 
the normal fixed charges have not grown as rapidly as 
the fund of value they tend to absorb. The increased 
intensity of wants causes values to rise. The standard 
of life and other social causes increasing the expenses 
of production may not rise proportionally. The result 
is a fund with no incontestable claimant. An insta- 
biHty results which shifts the free income from one 
group of producers to others having stronger temporary 
claims. 

This instability can be plainly seen in recent price 
movements. The price of food has steadily decHned, 
and with it rents have fallen. None of the gains of the 
increased production have gone to the agricultural land- 
lords. The rate of interest has also fallen, causing a 
reduction of the capitaHst's share in each commodity, or 
in the results of each day's work. The rate of wages 
has been kept down by the constant accession of 
laborers from outside regions. There thus arises a 
condition where none of the productive agents whose 
use creates the fixed charges in industry can increase 
its return enough to absorb the whole of the product. 
The growth of fixed charges lags behind the growth of 
value. The lower limit to prices set by the amount of 
fixed charges no longer equals the maximum Hmit 
to prices fixed by the pressure of consumers' wants. 
Prices, therefore, can be altered, creating a free income 
to be absorbed by those having the power to control 
them. This free income is a monopoly fund whose 
distribution is fixed when certain producers have endur- 
ing causes giving them an advantage. In the following 
diagram the total value of all goods on the market is 



Monopoly Advantage 



85 



represented by the area abce^ of which the area abgh 
represents the fixed charges that cannot be reached by- 
price movements. One part is cost which must go to 
those who endure them ; the other part cannot have its 
destination altered so long as the structure of society 
remains as it is. This fixed income includes the mini- 
mum wages of each class, the interest fund and a part of 
rent. The downward movement in price must cease so 
soon as the price of a commodity will no more than 
meet them. 



Free Income 
(The Monopoly Fund) 



Fixed Income 



Costs 



There is a fundamental difference between the fixed 
and free income, in that one has subjective causes and 
belongs to the consumer's world, while the other is 
objective and belongs to the realm of producers. In 
other words, it is the intensity of the consumer's wants 
and his power of substitution that determine the 
amount of the fixed income. The outward flow of 
energy and the return flow of goods necessary to keep 
up this energy is common to all members of the society. 
It goes to men not because they are producers but 
because they have certain qualities as consumers. 
Fixed income cannot be divided into funds and a law 
discovered for the distribution of each fund unless con- 
sumers are divided into classes through race differences. 
And in this case the funds have social causes, and their 



S6 The Theory of Prosperity 

determination is not a part of the present discussion. 
The fixed income goes to men in a homogeneous society, 
not because they are producers, but because they have 
certain quahties and standards as consumers. It is the 
minimum amount needed to make consumers active 
under existing conditions. 

Over the free income, however, the consumer has no 
control, and here the action of producers is supreme. 
For its distribution the law is the same as that con- 
troUing the price movements. Back of this distribution 
of the free income lies no force but the monopoly 
power of the different groups of producers. Prices 
are altered by limitations of supply, and these are due 
to the different rates of increase of the various articles 
brought on the market. The monopoly power of each 
group of producers is thus inverse to the rate of 
increase of its products ; the slower the rate, the greater 
is the monopoly power. There are as many indepen- 
dent factors in distribution as there are independent 
units of supply, and to get these units we must return to 
the consumer. If he had a complete power of substitu- 
tion, that is, if several commodities could supply each 
want or if several groups of producers could supply all 
his wants, there would be no monopoly. If he had no 
power of substitution, there being only one commodity 
that could supply each want, each commodity would be 
an independent monopoly. The partial power of sub- 
stitution existing at present throws into one group com- 
modities that can be more or less completely substituted 
for each other. A group of this kind has a price- 
determining unit of supply through which all the other 
units of supply have their prices fixed. 



Monopoly Advantage Z'] 

There are, then, as many independent monopolies as 
there are price-determining units of supply, and each of 
them is a factor in the distribution of the free income. 
Neither laborers nor capitalists nor landlords have 
common interests in this distribution. Each group of 
laborers, capitalists, and landlords has its income fixed 
by the monopoly power of the particular commodities 
this group produces. Wages, profits, and rent may 
therefore be going up in one group and down in an- 
other, with no rehef to the injured producers so long 
as the consumer's power of substitution is incomplete. 
Articles for which there are few substitutes are easy 
to monopolize. Coal oil to-day furnishes an example 
of a strict monopoly because many consumers are so 
situated that they can use no other light. A century 
ago, wheat in England had the position that coal oil 
now holds. Bread being the standard of life, a short 
supply of wheat forced up the price of all food products 
and associated the price of wheat with the land prob- 
lem. But land in this general sense was a monopoly 
only because the English people had so few substitutes 
for wheat. The connection between the price of wheat 
and the land problem was therefore only temporary. 
Now the many different substitutes make the interests 
of food producers divergent. Different regions, and 
often different groups of farmers in the same region, 
compete with one another. A general rise of land prices 
is no longer probable, although its price in particular 
regions may go up. Land is broken up between the 
various monopoly units in the same way that laborers 
and employers are. Independent units of supply thus 
lie at the basis of the distribution of the free income. 



88 The Theory of Prosperity 

The functional distribution that sought to fix gross wages, 
profits, and interests loses its importance where price 
movements permit producers to create monopolies. 
Each group of producers having one price-determining 
unit of supply obtains a certain gross income fixed by 
the strength of its monopoly. 

It is again the monopoly power of the various sub- 
groups that determines how much each of them gets 
of the gross income coming to the whole group. The 
laborers receive more or less of it as their power of 
substitution enables them to withdraw to better-paid 
occupations, or the lack of this power prevents outside 
laborers from competing with them. The capitalists, 
landlords, and employers have their shares fixed also 
by their power of substitution, each gaining as their 
own options increase or those of the other sharers 
decrease. There is thus within each group a functional 
distribution fixing the amount of wages, profits, and 
rents of those within it, but no general law determining 
the size of these funds. Gross wages are only the sum 
of the particular wage funds created by the indepen- 
dent units of supply. Two isolated groups of laborers 
with different powers of substitution have less in com- 
mon as income getters than they have with their em- 
ployers and other associates within their own group. 
Their interests as consumers and as participants in the 
fixed income are general, but not as contestants for the 
monopoly fund. 

From the foregoing it will be seen that monopoly is 
a problem not of values but of prices ; it forces up the 
prices of particular commodities and lowers those of 
others. There would be no gain to monopolists if the 



Monopoly Advantage 89 

ratio of exchange were not so altered that given quan- 
tities of their articles exchanged for greater quantities 
of other articles. Monopoly is thus a struggle between 
producers wrought out by price movements. The gain 
of one group is a loss to some of the others. To 
enlarge Ricardo's dictum about rent, monopoly creates 
nothing : it is a transfer, not an increase of wealth. 
Nor does it affect consumers except when they con- 
sume more than the normal amount of the monopolized 
articles, and then there is a corresponding gain to 
consumers using less than ordinary of these articles. 
A dollar will buy as much after the monopoly is formed 
as before, but a part of the public will have fewer 
dollars. The fall in price of the unmonopolized articles 
will reduce the incomes of some of the producers, leav- 
ing them less money to spend. There is thus a shifting 
of income, but no change in consumer's values estimated 
in dollars. The total value of all the goods consumed 
will not change unless the wants of consumers are 
made more intense or less intense. Monopoly has no 
influence on these subjective states of consumers. 
While it tells who will get goods by having the 
money to buy them, it gives no indication of the use 
to which these goods will be put. Prices settle struggle, 
values measure adjustment. Monopoly belongs wholly 
to the realm of struggle ; it has nothing to do with 
adjustment. 

Since monopoly is a phenomenon of price, its influ- 
ence can be traced in price movements. For every 
upward movement in price there must be in some other 
industry a corresponding fall in price. It is possible, 
therefore, to connect the two and bring out their causal 



90 The Theory of Prosperity 

relations. The classical illustration of this connection 
is to be found in the relation of the increased price of 
food and the fall in the rate of profits. We are told 
profits tend to a minimum. This means that through the 
increased use of poor land to feed a growing population 
its price rose, and with the rise the rate of profits fell. 
Food was higher, commodities were lower in price, and 
through the changed relation rents went up and profits 
fell. Here was plainly a transfer of income without an 
increase of wealth. 

So long as the only great monopoly was that of 
land, the effect of monopoly showed itself mainly in 
the changed relation of rent and profits. Many 
theories were developed showing that rent must 
rise and profits or wages must fall as population in- 
creased. The doctrines of Henry George are an exam- 
ple of the influence of these theories on those who 
believe them to be permanent tendencies of an advancing 
civilization. But the recent fall in the price of food has 
proved these inductions to be unwarranted. The high 
price of food is no longer the cause of low profits. 
Other monopolies than that of food have come in to 
replace the traditional monopoly of landlords ; and their 
influence on prices needs the same elucidation that 
earlier economists gave to rent. 

In the case of a food monopoly the influence on 
prices is easily traced. Food articles are distinct from 
the freely produced commodities upon which profits 
were made. Even the unintelligent public could recog- 
nize the change in prices. The influence of monopoly 
is now quite as marked, but it shows itself in less simple 
forms. Production is more complicated, and goods pass 



Monopoly Advantage 91 

through many more hands before they reach the con- 
sumer. Monopoly changes the relation between those 
producers whose efforts are needed to put a single 
product in its final form. In making canned fruits the 
price of tin for the cans, of sugar for sweetening, of 
the land on which the fruit is raised, and of the machin- 
ery and capital of the maker, all enter with the price of 
labor as factors in the final price of goods. If the con- 
sumer's power of substitution prevents a rise in the 
price of canned fruit, a rise in the price of tin or sugar 
must be accompanied by a fall in wages, in the 
producer's profits, or in the rent of land. There will 
always be a struggle between these five elements, the 
stronger for the moment gaining at the expense of the 
weaker. 

In the production of machinery also the same strug- 
gle is apparent. Some parts of the machine may be 
made of brass, others of fine steel, of nickel, of cast 
iron, or of wood. The proceeds from the sale of the 
finished product must be divided into these parts, and 
those having the greater monopoly power will gain an 
advantage. Many articles are more complex in their 
production, and about them the struggle for monopoly is 
even more marked. The greater the complexity of the 
goods, the sharper is the contest among those who must 
share in the final proceeds of the joint industry. 

A clear example of these tendencies is furnished by 
railroads. They must buy a thousand different articles, 
all of which are used up in creating the large service 
the corporation performs for the public. When some 
of these rise in price others must go down, unless in the 
meantime the monopoly power of the railroad over 



92 The Theory of Prosperity 

rates has increased. Usually the corporation must 
make economies in one direction to compensate for 
losses in another. It stands opposed to a thousand 
independent producers, each striving to increase his 
monopoly power but each losing to the degree that 
others succeed. The rise in the price of steel rails, tin, 
copper, leather, wool, or machinery secures to particular 
producers an advantage which some other group of pro- 
ducers must pay for in the lowered prices of their com- 
modities. The corporation is merely an adjuster of the 
effects of their struggle. It cannot increase or decrease 
the total amount of its expenditures except as its rela- 
tion to the public is altered, and this relation is deter- 
mined by considerations with which the struggle betv/een 
those from whom it buys has little to do. 

The growth of one monopoly is always at the expense 
of other monopoHes, never at the expense of the public. 
But this is not to be interpreted as meaning that those 
who regard themselves as a part of the public never 
lose by the growth of monopoly power in some new 
direction. Farmers, for example, get their incomes 
partly from the land and partly from their labor. As 
owners of the land they are monopolists, and may lose 
as landlords in the reduction of the price of land. The 
falling price in food has been a cause of the growth of 
monopoly power in other directions. Had the price of 
food remained high, the industrial trusts would have met 
obstacles to the rise in their prices that could not have 
been overcome, or at least not as fully as they have been. 
Food has a first claim on income ; a shortage in its sup- 
ply affects immediately the prices that trusts may set for 
their products. 



Monopoly Advantage 93 

A part of the losses following the recent development 
of trusts has fallen on the farmers, because the falling 
price of food has affected their monopoly as landlords. 
Another great loss has been felt by the capitalists 
through the fall of interest. A large fund was in these 
ways set loose, in the absorption of which other mo- 
nopolies grew. They will grow still further, when other 
special monopolies lose their present power. The rail- 
roads for a long time had a monopoly power at the ex- 
pense of farmers. The present valuation of railroad 
securities could not have been reached if the falling 
price of food had not enabled them to raise their 
rates relatively to other prices. The public had no 
option but to use the railroads and to send their 
goods to European markets. At the present time, 
however, the power of substitution of shippers is 
steadily increasing. Southern markets are opening 
up, and new water routes will soon be able, by cutting 
under railroad rates, to reduce them to a minimum. 
The monopoly power of railroads seems, therefore, to 
have reached its maximum. Between the industrial 
trusts and the railroads, the former have an increas- 
ing advantage. The railroads cannot raise rates in 
face of an increasing power of substitution on the part 
of shippers. This means decHning values for railroad 
securities, especially in places where the gross traffic is 
likely to fall off because of a change of the direction of 
commerce. 

Thus monopoly will struggle with monopoly. New 
ones will displace the old, and probably with an increas- 
ing rapidity. The monopoly of agricultural landlords 
continued over a century ; but it fell at last, and so will 



94 T^he Theory of Prosperity 

other monopolies, of which much is heard. A substitute 
will be found for coal oil as one was found for wheat. 
The place where the consumer's power of substitution 
fails is constantly shifting, and as it shifts, new monopo- 
lies will spring up and old ones cease to exist. The 
monopoly fund at a given time is definite. More than 
this monopoHsts cannot get ; less than this the public 
will not lose until the standard of life and social institu- 
tions are so changed as to permit the public to absorb a 
larger part of the gross income of society. 

The burden of monopoly thus falls on other monopo- 
lists. Only those who have had some special ad- 
vantage lose through others securing a still greater 
advantage. It is not a matter of indifference who 
has superior advantages. Some monopolies are more 
diffused than others. The rent of land held by small 
farmers and the gains of trades-unions improve the 
condition of large numbers of people, and yet these 
gains are not different in kind from those of other 
monopolies. Monopoly power may be rightly used or 
wrongly used, but it is still monopoly power, and is a 
pressure that takes from others who have an advantage, 
but not so great an advantage as those who profit by 
it. The pubhc gains not through modifications in the 
process of struggle, but in that of adjustment to nature. 
The more perfect the adjustment, the less are the net 
proceeds to be distributed by struggle. 



CHAPTER III 

Investments 

Production is the act of putting things in motion, surplus 
There is no productive process that is not resolvable v*^^^- 
into labor; and viewed from the standpoint of time, 
nothing is seen but a series of efforts. Go into any 
factory, watch any transformation of goods or examine 
into their movement from market to market, and noth- 
ing else appears. Labor is the expenditure of energy, 
resulting in the movement or the transformation of 
goods. The man who writes a check or sends a tele- 
gram labors as well as he who follows a plough or tends 
a loom. His energy puts objects in motion, and thus 
helps to create utility and value. It is this expenditure 
of energy in all its forms that constitutes labor and 
makes up the whole visible process of production. 
Pain is an incident to production, not its measure or 
cause. Were all activity pleasurable, it would still 
be work when it moved or transformed goods so as 
to increase their utility and value. 

All production being work and nothing being pro- 
duction but work, it would be natural to expect that 
work and value should correspond. Ten units of labor 
would then create ten units of value. Many theories of 
production are based on the fairness of this relation. 
If total values exceed the total amount of work, the 
laborer^ it is claimed, is exploited and can demand 

95 



96 The Theory of Prosperity 

changes to remedy the evil. Surplus value to many is 
the one evil that crushes the laboring class. 

It is usually said in explanation of the capitalist's 
activity that he furnishes the tools, building, and ma- 
terial which the workman transforms into finished prod- 
ucts, and for the use of these goods he receives a 
return in the form of interest. This explanation is only 
partial. The tools, building, and material were the 
result of activity, and can be resolved back into the 
labor by which they were created. The end of labor is 
goods to consume. The means of getting them is the 
expenditure of energy. Buildings, tools, and material 
are but partially made consumption goods into which 
they are gradually being transformed. Ploughs, harvest- 
ers, grist mills, and ovens are but partially made bread. 
There are only two clearly defined standpoints from 
which to view production — either in terms of energy 
expended or utilities produced. Capital must be viewed 
as an aid to the consumer in getting utility, or to the 
producer in expending energy. There is no third 
category. 

From the standpoint of the consumer, everything is 
goods. Consumption goods are those capable of giving 
direct satisfaction. Production goods do not create this 
satisfaction. They are of use in further production, or 
are partially made consumption goods. Everything 
gets its value from the final consumption good into 
which it is transformed. The value of production goods 
cannot exceed the utility of the consumption goods 
made from them. They do, however, fall short of this 
value by the amount of the interest fund, and thus sur- 
plus value appears. These production goods are often 



Investme7tts 97 

called future goods because they are aids to future en- 
joyment. Consumption goods are present goods be- 
cause they yield immediate pleasure. Future pleasures 
are not so highly esteemed, unit for unit, as present 
pleasures, and hence future and present goods will not 
exchange on a par. The holder of future goods makes 
a gain through the steady transformation of his goods 
into present goods. He is always exchanging over- 
valued present goods for undervalued future goods. 
The sum of these gains is the interest fund. It is a 
phenomenon of exchange, not of production. The use 
of capital demands no new form of labor; it augments 
the utility of what is made. 

If it is desired to view capital from the standpoint of 
production, it is necessary to think of it in terms of 
labor and expenditure of energy. The use of capital 
means the employment of laborers in a series, and this 
makes what has been called roundabout production. 
The material to be transformed into goods passes 
through the hands of many persons, each of whom does 
something that helps the goods to attain their final form. 
This series of laborers must all be paid out of the final 
product, and some rule for its distribution must be 
agreed upon. If they all share ahke, every one would 
want to do the last day's work by which the article 
assumes its final form. No one is willing to plough the 
land, wait for a year, and then share equally with the 
man who baked a loaf of bread made from the produce 
of this land. For each unit of labor expended on the 
land, a larger share of the bread must be given than for 
units of work expended on the bread. For each day's 
work, the ploughmen would get, say, one hundred units 



98 The Theory of Prosperity 

of the final product, the harvester of the grain, ninety- 
nine units, the miller, ninety-eight units, and the baker 
ninety-seven units. In order that this may be done, the 
value of the bread must be greater than the value of the 
labor at the time it was performed. If the present value 
of a day's labor is ninety-seven cents, bread made by 
four days' labor (one each of the ploughman, harvester, 
miller, and baker) would have when made a value of 
three hundred ninety-four cents. The value of the 
labor when exerted is three hundred eighty-eight cents. 
There is thus a surplus value of six cents above the 
price of the labor. In all cases of serial labor a similar 
surplus appears. Finished goods are esteemed more 
highly than the labor by which they are made. 

To say that future goods do not exchange on even 
terms with present goods is the same as saying that the 
first laborer in a series receives more of the final prod- 
uct than the last laborer gets for the same effort. 
Either view shows the presence of surplus value, and 
raises the question as to its cause. The explanation is 
the theory of interest. 

But in the explanation the causes that are a part of 
existing conditions must be separated from those due 
to heredity. Bohm-Bawerk has advanced a theory of 
interest that throws the emphasis on race differences. 
He enumerates three causes for the underestimation 
of future goods : ^ the incompleteness of the imagi- 
nation men form of their future wants, defects of 
will by which wrong choices are made, and the short- 
ness and uncertainty of life. So long as these defects 
exist, society is divided into two parts. Those with a 

1 The Positive Theory of Capital, p. 264. 



Investments 99 

favorable heredity esteem future goods more highly 
than those less developed psychically. This second 
class produce future goods in too large quantities, 
and hence depress their value below that of pres- 
ent goods. Defective heredity thus gives a monopoly 
value to present goods of which advantage can be taken 
by those whose mental traits or social position favor the 
accumulation of wealth. Where these race differences 
exist, one part of society becomes capitalists, and the 
other remains mere workers. There is a flow of income 
from the latter to the former, which is the interest fund 
viewed as a race problem. Should the race be unified, 
and these defects be removed through mental develop- 
ment, interest would vanish unless it has a cause in 
existing conditions. Interest paying is a burden to 
those whose way to better methods of production is 
blocked by their mental defects and social position. 
As an economic problem, however, it is a part of a 
scheme of cooperation to which equals resort. The 
payer of interest has a compensation which recoups 
him for the loss. 

The increased quantity of any article gives decreas- The cause 
ing pleasure in its use. From this the inference is of interest, 
naturally drawn that the possession of greater quanti- 
ties of goods leads to a reduction in their value. The 
marginal utility, it is said, falls off with the increase of 
supply, and the value must sink with it. This result 
would follow if it were not for the increased variety of 
consumption. A greater total quantity of goods may 
be coincident with greater values, if the number of the 
goods used increases more rapidly than the quantity. 
In this case the marginal utility will be higher, less 



lOO The Theory of Prosperity 

being used of each article. A rising margin of con- 
sumption is a sure index of progress, and shows that 
the variety of wants is growing more rapidly than the 
total means of satisfying them. 

This effect of an expanding consumption is reenforced 
by the enlargement of the complements of goods neces- 
sary for their full enjoyment. Some articles giving 
little pleasure by themselves are intensely enjoyable 
when they come as a supplement to other articles. 
Cake, though wanted by no one as a chief article of 
diet, gives great pleasure as a dessert. Oil and vinegar 
bring into demand many a vegetable otherwise inedible. 
Wine often makes all the difference between a good 
and a bad dinner, and a good cigar at the end may 
atone for the sins of the cook. Beautiful dishes or 
flowers increase the enjoyment of the banquet table. 
Furniture, besides being necessary, may add to the charm 
of a house. These examples of complementary goods 
are not isolated exceptions. Not even the simplest pleas- 
ure is free from them. 

This principle modifies the conclusion naturally made 
about the fall of marginal utility with the increase of 
goods. The civilized man uses more goods than his 
primitive ancestor, but he uses a smaller amount to 
satisfy any particular want, or if he uses a like or larger 
amount the good satisfies other wants. Men thus value 
additional quantities of goods more highly than they 
value the goods they have. If 50 units of goods con- 
sumed daily produce a given quantity of pleasure, and 
55 units enable the user to put his goods into better 
complements, he values the additional 5 units at a 
higher rate than those he possesses. He will impute 



Investments lOi 

to them all the difference between the pleasure of the 
50 units in their present combination and the 55 units 
in their better complementary relation. 

The advantage of increased variety in consumption is 
shown in the follov/ing table, where a, b, c, etc., repre- 
sent the different articles in use. 

Units of Units of 
commodity utility 

I4«+ io<5 + 8^= 32 = 32 

I2a+ 93+7^ + 50^= 33 = 35 

iia+ 83 + 6^ + 4^+5^= 34 = 3^ 

ioa+ 7^ + 5^+3^ + 4^ + 67=35 = 4i 

In the first case 32 increments of commodity are 
assumed to produce 32 units of utility ; in the second 33 
units of commodity produce 35 units of utility; in the 
third 34 units of commodity produce 38 units of utility, 
and in the fourth 35 units of commodity produce 41 
units of utility. In each of these cases an additional 
increment of goods allows the consumer so to rearrange 
his consumption that 3 units of utility are added to his 
pleasure. He would, therefore, be wiUing to pay three 
times as much for his last unit as he pays for the other 
units if they are to be consumed without it. If two 
men, each having 32 increments of commodity, meet for 
the exchange of goods, each of them would be willing 
to give the other the equivalent of three units of pleas- 
ure to get from him the additional increment needed to 
enlarge his complement of goods so that his consumption 
would come under the second case. The same motives 
would prompt a similar bid if two men in any of the 
other classes met to exchange goods. The man with 
the larger consumption would have a better complement 
of goods, and could afford to bid three units of utility to 



102 The Theory of Prosperity 

be changed from one class to another. There is always 
a pressure on a man to consume more than his share or 
his income so as to enjoy the effect of the enlargement 
of his complementary consumption. Each increase in 
the amount of his goods gives a still greater increase in 
the amount of his pleasure. Consumers want to use 
more than they have, and make higher bids per unit 
of goods to get them. The greater the quantity of the 
goods the greater is their value per unit. A surplus 
value is thus created by changes from a smaller con- 
sumption of units of goods to a larger and hence a 
more harmonious consumption of these units. This 
surplus value is the source of interest. 

The cause of interest was present before capital came 
into use. In celebrating a wedding, a birth, or other 
social events, the additional goods needed for this end 
had a higher utiHty to a primitive man than those of 
everyday use. New complements were formed that 
perhaps more than doubled the value of each unit of 
goods necessary to complete them. He was willing, 
therefore, to borrow the necessary funds of his neigh- 
bors and to pay a high rate of interest for them. In 
this he was justified because of the added utility of the 
enlarged complements. The pleasure of these feast- 
days more than made up for the privations that fol- 
lowed when the debt was paid. 

The extra expenses of burial rites and of charms to 
drive away sickness were even more urgent, and for 
these ends borrowing was freely resorted to. And 
these expenses were also legitimate. The greatest total 
utility is obtained by a primitive man from irregular 
expenditures, and not from the steady outlays approved 



InvesUnents 103 

by civilized men. If the desires of men vary in intensity, 
an unevenness of outlay is a rational use of income. 
There are thus even in the earliest societies motives that 
lead to the payment of interest. Every social event 
enlarged the complement of goods and created a surplus. 
We have in such societies a surplus to consumers, 
making it advantageous for them to pay interest. For 
the individual interest-paying was justifiable, but not 
from the standpoint of the public. There was a loss 
in goods in each feast or rite celebrated and no corre- 
sponding gain in goods. The community was made 
poorer even if the individual was made happier. Early 
governments and religions ruled against interest-paying, 
and thus protected the public against the evil results 
following a reduction in the quantity of goods. Inter- 
est-paying becomes especially bad in a composite com- 
munity where a minority do not feel the need of 
following the social customs, demanding large expendi- 
tures of goods. In this case a class arises that lend 
to others, but never want like favors. They become a 
creditor class who constantly exact a tribute from the 
public, and thus cut down the average consumption of 
citizens by the amount of the interest paid to the out- 
side class. The interest fund thus becomes a public 
burden without any compensation. The opposition to 
money lenders is natural so long as there is no fund 
from which to pay interest. To bargain away future 
goods for passing utilities only adds to misery. And 
yet the tendency to do this is strong in every primitive 
man. Interest-paying is thus a universal tendency, but 
a bad one socially, where no fund of goods is at hand 
out of which the obligation can be met. The cause of 



I04 The Theory of Prosperity 

interest is the extra pleasure added by the last increment 
of each complement of goods. The man who pays 
interest always has an extra enjoyment out of which to 
pay it. The value of goods in complements is greater 
than the value of individual goods composing them. 
These complements grow in size with each increase in 
the quantity of goods. An increase of goods not only 
supplies more wants; it supplies intenser wants, and 
puts the consumers under pressure to consume more 
than their income. The struggle for additional goods 
causes them to bid higher for these goods, and thus 
the fund of extra pleasure due to the increased size of 
the complements is transferred to producers. The 
latter get what the conditions of increased consump- 
tion create. The use of capital goods is not the cause 
of interest ; it only creates the fund out of which inter- 
est is paid, and thus makes the natural promptings of 
the consumer harmonize with the good of the public. 

Future goods, unit for unit, do not have the value of 
present goods. The converse of this proposition is 
equally true though often overlooked. Where present 
goods are overestimated, the labor employed in making 
future goods is raised in value if its value is reckoned in 
future goods ; or to put this fact in another way, when 
present goods are raised in value, the makers of future 
goods get more for their services, measured in the 
articles they make. The demand for goods creates a 
demand for the labor that makes them. The lower 
value of future goods is due to higher value of labor. 
A man cannot enjoy goods and work at the same time. 
If the pleasure of enjoyment is increased, the wages 
of labor measured in what is made must also go up. 



Investments 105 

This modification of values, due to an increase of 
pleasure, often happens where no future production is 
involved. On a holiday people are especially desirous 
of enjoying themselves. If a man works to supply these 
intense wants, he must be paid a higher rate of wages. 
If the pleasure of the day is double that of ordinary 
days, the wages of those who work must be doubled. 
These men must take their enjoyment on the ordinary 
days that follow, and must therefore be able to buy 
double the quantity of goods to get the same net 
pleasure that other people had on the holiday. This 
exchange is the same in essence as interest. A higher 
value of present goods demands as an equivalent a 
higher value of the labor engaged in making future 
goods. If a man gives up a part of what he might 
enjoy to-day, to produce for the morrow, he must be 
paid more in the goods of the morrow than if he did 
not forego present consumption. If 100 units of pres- 
ent goods is valued at 106 units, the maker of future 
goods who formerly received 100 units of these goods 
per day must now receive 106 units. No production of 
future goods can now be profitably carried on unless 
the return is sufficient to pay the workman 106 units of 
goods a day. There must be an increased productivity 
of labor in future goods to correspond to the increased 
value of present goods. The use of capital goods per- 
mits this increased productivity. There is now a fund 
of goods out of which the increased wage can be paid. 
The value of future goods does not sink as low as it 
would if this increased wage (measured in future goods) 
was not required. 

If present goods are valued six per cent above future 



io6 



The Theory of Prosperity 



goods, wages measured in future goods are also raised 
to six per cent. There is thus an objective fund in 
future goods equal in size v>rith the subjective fund of 
utility created by the extra inducement to consume. 
The laborer has six per cent more goods if he takes 
future goods, and he has the same amount if he takes 
present goods. The extra goods that make up the 
objective interest fund do not come from his wages, 
but from the increased productivity of capital goods. 
Where interest is paid, the marginal productivity of 
society is raised by a Uke amount. The interest fund 
is therefore a net gain to society. No one is burdened 
by its payment. 

In Diagram XI the base line ab shows the quantity of 
goods normally consumed, whose utility equals the area 

abed, the margin of con- 
sumption equals the line 
be, and the expense of 
production is measured 
by the distances between 
the lines ab and kc. If 
a new group of comple- 
ments could be formed 
by the addition of goods to the amount of bf, the mar- 
ginal utility would be increased to ef, and the total value 
of all the goods consumed would be raised from the 
area abch to afeg. Goods to the amount of 4^ would thus 
increase values by the amount of the areas beef and eegh. 
The interest fund in this case is the added value per unit 
of goods that is created by the new conditions. It would 
be, if measured subjectively, equal to the area ghme. 
The ratio of ah to hg would be the rate of interest. 




Investments 



107 



■-^-^^^.^^^^^ FIG. XII 




Interest 

c 




e 


-— -^ 


J? 



Diagram XII measures the same fund objectively. 
The Hne ab equals the amount produced measured in 
units of time, say days' work. In the most productive 
occupation ad is the return measured in goods. This 
return would gradually decrease as more days' work 
were employed, until mb, the marginal occupation, is 
reached. The lower value 
of future goods being the 
same as a higher value 
of labor, ag represents 
wages in future goods, 
while ah shows what they 
would be in present 
goods. So long as the ^ 

rate of wages equals ag, the margin of production 
is kept at mb. There is thus a fund of goods turned 
over to workers equal to the area ghcm. These 
are the goods through which interest is paid. If 
they were not given to workers, wages would fall, 
and production would be extended to the new mar- 
gin, ef. 

The net effect of interest is to stop production at a 
higher point of productivity than if it were not paid. 
If there were no need of paying interest, the amount of 
production would be increased from ab to af. More 
laborers would be employed, but at no higher rate of 
wages. This quantitative increase of society would be 
the only effect of the disappearance of interest, and 
even this change would be slight if the amount of 
unused resources at the margin of production were 
small. Interest-paying thus slightly checks the growth 
of society, but imposes no burden on it. The interest 



io8 The Theory of Prosperity 

fund comes wholly out of the increased marginal pro- 
ductivity caused by its payment. 

Production, it should always be remembered, is the 
making of goods, and interest is a payment in goods. 
There must, therefore, be an increased productivity 
before it can be paid. If without paying interest looo 
pounds of coal can be mined in a day, 1060 a day must be 
mined before capital valued at six per cent can be used. 
If 100 yards of caHco are made by a workman in a 
week without any fixed capital, he must at least produce 
with capital 106 yards in the same time before it will 
come into use. In all cases the margin of production is 
higher after the use of capital than it was before. The 
increased productivity may be much more than suffi- 
cient to pay the interest demanded. The price of 
goods would then fall, but not so far that the product 
of the marginal laborer under the new conditions will 
have no higher value than his product under the old 
conditions. The new marginal product is much greater 
in amount and a little greater in value. Interest is the 
difference in value between the new and the old 
marginal product. 

The two views thus harmonize. Interest to the con- 
sumer is an extra fund of utility due to the enlargement 
of his complements of goods. The struggle for this 
increased pleasure raises the value of goods, and gives 
an extra inducement to producers to increase their out- 
put. Interest to the producer is a fund of goods paid 
for the use of capital to increase his productivity. He 
pays this without any loss, because the margin of pro- 
duction under the new conditions is raised by the 
amount of the interest fund. Labor without capital 



Investuients 1 09 

can still make the same return as before. Labor with 
capital gets an extra return equal to the rate of interest. 
The payment of interest is no more of a burden than is 
the payment of rent to a farmer on superior land. There 
5s in each case an extra productivity equal to the cost 
of the superior instrument of which use is made. Inter- 
est is thus a kind of rent. 

Producers and consumers both get an advantage out 
of the new conditions. There is an increased utility to 
the consumer, and an increased productivity to the 
worker. In each day or stage of production a man 
makes a choice. He consumes more and gets the 
added utility, or produces more and gets the added 
productivity. The man who does not get interest is 
not without a gain. He has enjoyed larger comple- 
ments of goods than he otherwise could have done, and 
thus has secured an extra fund of utility equal in value 
to the interest fund going to others. Interest-paying 
checks the mere quantitative growth of society and 
forces qualitative changes in which all participate. It 
represents the victory of modern and varied consump- 
tion over the cruder use of goods that formerly pre- 
vailed. It is not due to the pain of abstinence, but to 
an extra inducement to consume. Added pleasures of 
consumption must be offset by an increased return for 
working. Primitive costs like abstinence and primitive 
defects like the lack of will power or the undervaluation 
of the future will disappear, but interest must endure 
while complementary goods — the test of social better- 
ment — increase the pressure that causes it. 

Interest is a flow of income to the holders of capital Funded 
goods. It is measured subjectively by the added ^^^°"^^' 



no The Theory of Prosperity 

utility of the last unit of consumption, and objectively 
by the increased return due to the last increment of 
capital goods. Interest is price-making, because goods 
made by capital have their value raised in comparison 
with those made by labor. There are always move- 
ments in prices when the rate of interest alters. There 
is, however, a kind of income usually regarded as inter- 
est that is not price-making, but price-made. It is due 
to the fact that different parts of the supply of certain 
articles do not have the same expense of production. 
Wheat is raised on land of different degrees of fertility. 
The price must be high enough to induce cultivators to 
produce on the poorer land. This price is more than 
sufficient to pay for the labor and capital employed on 
the better land. There is thus a flow of income to the 
owners of this land to which the name rent has been 
given. It is neither wages nor interest. 

In spite of the fact that this third form of income is 
not interest, it is properly regarded as interest by men 
of affairs. The reason is that it is always funded and 
then bought and sold under the same conditions that 
capital goods are. Funded income gets its price from 
the amount of the income, and its value depends upon 
the rate of interest. To an investor an income to the 
amount of one hundred dollars has the value of an 
amount of capital goods that will yield a like income. 
The price of land also is fixed by its net income valued 
through the rate of interest. With the same net return 
land rises and falls in value as the rate of interest 
changes. All funded income gets its value in this way ; 
its price being estimated through the rate of interest 
it becomes so much like capital that the difference is 



Investments III 

overlooked. Nor is the difference worthy of considera- 
tion while production remains static. The income is 
the end of investment, and a price-determined income 
is as safe as a price-determining one. The difference 
appears only with movements in price, when all 
funded income must be revalued according to the new 
rate of interest. 

To meet this practical situation the word capital must 
be used in two senses, or a new term must be intro- 
duced. The distinction has been made between capital 
goods, or concrete capital embodied in objects that aid 
production, and social capital, which includes capitalized 
income, as well as the concrete aids to production. 
Land, mines, railroad stock, franchises, and other 
valuable rights and privileges are capital in this sense. 
They are all investments, and must be contrasted with 
capital in the sense of capital goods, thus giving a clear 
perception of the difference between the price-making 
income due to capital goods and the price-made income 
arising from differential expenses or from monopoly. 

This price-made income like rent is the effect of price 
and not its cause, yet it is due to a movement in prices. 
Income is always derived from price relations, and 
funded income is no exception to the universal rule. 
Before the rent of land can increase, there must be a 
rise in the price of food, for increasing prices of agricul- 
tural products go with increasing rents. Yet rents are 
not the cause of the high prices, since the price move- 
ment comes before the rise of rent. Rising prices 
also precede the funding of income. The goods from 
which the funded income is drawn are no higher in 
price than similar goods frorn which there is no income 



112 The Theory of Prosperity 

of this kind. It is a result of the causes that fix the 
prices of goods for which they can be substituted. It is 
thus price-made, yet some article has changed in price 
whose place it can at least partially take. 

Funded income is always differential. This does not 
seem true because so many monopolized articles yield 
an extra profit on all parts of the supply. Each gallon 
of coal oil sells for more than its labor price, and thus 
yields a large marginal profit. It seems, therefore, to 
differ from the products of land, some part of which 
sells at its labor price and thus pays no rent. 

The difference, however, is not real. Land, in the 
sense economists use it, is not a concrete object with 
given qualities. It is an abstract concept including all 
the sources from which food comes. If it were defined 
concretely in terms of soil, climate, or geographical 
position, all of many kinds of land would yield a rent. 
Even if a more abstract classification of land were used 
and it were divided into wheat land, corn land, plough 
land, pasture land, and wood land, all of some of those 
kinds of land would pay rent. It is only when all 
definite qualities are lost sight of, and land is thought 
of merely as a food-producing unit, that a truly differ- 
ential series is found. Of these abstract units of land 
we may be sure that some pay no rent, but of any 
concrete kind of land all its units may pay rent. 

Put in this way, the same facts are true of commodi- 
ties. All of any commodity may pay rent, just as may 
any concrete kind of land. But abstract units also 
exist among commodities. They supply wants, and each 
want may be satisfied in a variety of ways. Men want 
light, and one way of supplying it is to buy coal oil But 



Investments 113 

for coal oil there are many substitutes ; and every article 
that gives Hght must be made a part of the group of 
goods by which light is produced. We must therefore 
think not in terms of coal oil, gas, electricity, lard oil, 
and whale oil, but abstractly of units of supply. Put 
all these articles in a series, and we have an abstract 
unit like land. Arrange them in order of their expense 
of production, and the series will be differential just as 
the products of the land are. There is always a price- 
determining unit of supply for each want. All other 
units of supply have their value set by this unit, and they 
yield a rent equal to the difference between their expense 
of production and that of the marginal unit of supply. 

The law of rent is merely an outcome of the law of 
substitution. Articles used in supplying the same want 
have the same price. If they differ in the expense 
of their production, the cheaper articles yield a rent. 
Rent appears when the supply of goods capable of 
satisfying a want is less than the demand. The price 
rises, and more expensive units of supply are made use 
of. The cheaper goods now give an extra profit that 
may be funded; but in this land does not differ from 
other forms of production. Every series of goods sup- 
plying a single want forms a group with one price-deter- 
mining unit of supply. Each particular good, however, 
has a definite expense of production just as does each 
concrete kind of land. 

Any concrete good has the same expense for all its 
units. Every abstract group made up of goods supply- 
ing a single want makes a differential series with one 
price-determining unit. Each good is, therefore, a part 
of two groups. As a concrete object, it is a part of a 
I 



114 ^^^^ Theory of Prosperity 

group of like objects having one cost of production. In 
its want-supplying power it is a part of an abstract 
group having a varying expense of production. Viewed 
concretely, a given good may have a marginal profit on 
each of its units. We can, therefore, say that it yields 
a marginal return above expenses. Viewed, however, 
abstractly as a supplier of wants, this marginal profit 
becomes a differential rent. The marginal profit on 
the concrete good exists because some unit of supply 
is more expensive than it. A given return, therefore, 
becomes profit or rent according as the good that pro- 
duces it is viewed concretely or abstractly. The producer 
makes concrete objects, and views them concretely; his 
extra return is marginal, and he calls it profit. The con- 
sumer views goods abstractly as units of supply, and for 
each want there is a price-determining unit, whose cost 
fixes the extra return on all other units. This extra 
return is differential, and those who pay it call it rent. 
Profit and rent, however, are not two funds ; they are 
one fund viewed in different Hghts. 

I.et it be assumed that a given district is supplied 
with light from four sources, whale oil at a cost of ten 
cents per unit, electricity at nine cents, coal oil at eight 
cents, and gas at seven cents. If these units of light 
were equally satisfactory to consumers, the price would 
be ten cents per unit so long as all four kinds of light 
were used. On the electricity used there would be an 
extra return of ten per cent, which would be called 
profit by the owners of the electric plants, and would be 
a marginal return on the concrete capital they employed. 
On the capital used by those who furnish the coal oil 
there would be a return of twenty per cent, and on the 



Investments 



115 



capital of the gas company the return would be thirty 
per cent. All these profits would be marginal ; dividends 
to these amounts would be given on all the real capital 
of each company. At the same time this whole extra 
return would be rent if viewed from the standpoint of 
units of supply. Each such unit would yield a rent equal 
to the difference between its expense and that of a unit 
of whale oil. Getting its value from the rate of interest 
on capital goods, it either is or may be funded. It is 
thus lost sight of as a distinct fund, and is confused with 
interest by the business world. Profit is a per cent of 
advance on concrete goods. Rent is a differential based 
on abstract units of supply. Those who get an extra 
return call it profit, and impute it to their capital. Those 
who pay it call it rent, and think of it as unearned incre- 
ments of income. This means that in an abstract series 
all price-determined income is differential, but in its 
concrete form it is marginal. 

FiG.xni 



Whale Oil 
10c 








Electricity 
9c 


Rent 




Coal Oil 
8c 




Gas 
7c 



These facts may be presented in a diagram by letting 
the base line represent units of supply, and the upright 
lines the price of the different units. The whole dia- 
gram would then represent the total cost of light to the 
district. The upper part of the diagram is the rent that 
may be funded. 



1 1 6 The Theory of Prosperity 

The preceding discussion has helped to simplify the 
problem of income. There is one kind of income 
derived from the exertion of human energy and another 
from the use of capital goods. These two, wages and 
interest, are the only price-determining elements, and 
thus are the causes of price movements. There is also a 
third kind of income that is price-determined. Looked 
at in one way it is a funded income, in another it is 
an unearned or costless income. In some of its forms it 
has been called rent and in others profits. It is, however, 
one fund and governed by one law. When there is an 
upward movement in the price of any unit of supply, 
unearned income, funded income, price-determined in- 
come, profits or rent appear. It matters not what it 
is called. It is the same fund, however viewed or 
named. 

While this analysis gives three kinds of income, the 
business world recognizes but two. Both employer 
and employed divide income into two parts and attrib- 
ute to the other all that is not in the part which they 
share. " All that is not profits is wages, and all that 
is not wages is profits." This is not a mere statement 
of John Stuart Mill. It is echoed by every business 
man and by every workman. An apparent opposition 
is thus created between the return on capital and labor. 
It is felt and asserted that one form of income cannot 
grow but at the expense of the other. Each recipient 
of income recognizes that it comes from a particular 
source, and sees it decrease or increase because of 
changed relations to another source of income. Now 
there are but two concrete sources of income, human 
labor and capital goods. Nothing of value is ever 



Investmerits 117 

produced but where one or both of these exist. They 
are the only concrete objects in production, and any 
thoroughly concrete view of it must impute all income 
to one or the other of them. Where then is the un- 
earned income called rent if neither laborers nor capi- 
talists admit its existence in the income they receive } 

From either point of view, then, there is a direct 
opposition between interest and wages. The whole 
return from industry is assumed to go into one or the 
other of these two funds. If, then, quantity of capital 
is fixed, what each additional laborer adds to the total 
product is his natural wages, and determines what all 
other laborers shall receive. Wages are thus measured 
at the margin of production, and rise or fall as the 
margin of production changes. When, however, the 
number of laborers is fixed, what an additional incre- 
ment of capital adds to the total product equals the 
rate of interest. The owners of other capital goods can 
get no more than is created by the marginal increment 
of capital. Interest is thus measured at the margin 
of production, and rises or falls with it. Production, 
thus viewed from the standpoint of the capitalist, 
makes interest marginal and the only marginal return. 
Viewed, however, by the laborer wages are marginal 
and the only marginal return. Wages and interest can 
thus in turn be represented as differential and marginal. 

In the first diagram^ interest is marginal, and the 
amount of wages is the difference between the total 
product and the amount of interest measured by the 

^ These diagrams are taken from Professor Clark's recent book on 
"The Distribution of Wealth " (p. 330), to which the reader is referred for 
a more complete discussion. 



ii8 



The Theory of Prosperity 



marginal return on capital Wages in the second dia- 
gram is marginal, and interest is the difference between 
the total product and the amount of wages measured by 
the product of the marginal laborer. As both diagrams 
represent the total product, wages, as differentially 
determined in the one, must equal wages marginally 
determined in the other. The two areas representing 
interest are equal for the same reasons. The whole 
product from either point of view becomes wages and 
interest and nothing else. There is no unearned income 



FIG. XV 




in sight, and the popularly conceived opposition between 
the two seems to be justified. 

Let us, however, examine more closely the full mean- 
ing of these diagrams and the ideas they represent. 
When it is said that the number of laborers is fixed and 
the quantity of capital goods increases, it seems as if all 
the additional return were due to the increase of the 
capital goods. This, however, is not true. Capital 
goods are made productive by some application of 
force, but not necessarily by some appHcation of labor. 
Labor and labor force are different. The latter includes 
more than the former. Labor means a number of days' 
work done by human beings. Labor force is any 
mode of motion that makes capital goods productive. 



Investments 119 

A machine can be set in motion by human hands ; it 
can also be set in motion by water-power, wind, steam, 
or gravitation. Each of these is a part of labor 
force in the sense that they are substitutes for human 
exertion, and must be reckoned with in any attempt to 
make an additional quantity of capital goods productive. 

If the number of laborers is fixed and the quantity of 
capital goods increases, it does not mean that there is 
no increase of labor force. Many natural forces will 
be used to make the capital effective, and the laborers 
themselves, although no more in number, represent 
more labor force. If a man tends three machines in- 
stead of two, there is with this increase of capital no 
increase in the number of days' work. But each laborer 
is used more effectively, and certain qualities in him 
that were dormant when he tended but two machines 
become active when he tends three. If a farmer buys 
a windmill, he does not necessarily employ more labor- 
ers, but he who cares for it is more efficient. The 
labor force has thus increased with this growth of 
capital. 

The contrast is not between capital goods and the 
day's work of a fixed number of laborers. With capital 
must be contrasted all the forces, natural and human, 
that determine its productivity. These natural forces 
are indefinite in number, and vary in their usefulness 
with the amount of capital. Every increase in capital 
makes them more effective, and thus increases their 
number considered solely as aids to the utilization of 
capital. Laborers, too, are not single units in their 
relation to capital. They are to be regarded as having 
in them a number of different possibilities for making 



1 20 The Theory of Prosperity 

capital effective, each of which is more or less fully used 
according as the quantity of capital with which they 
come in contact is great or small. Some of them may 
not be used at all if the quantity of capital is limited. 
It is hard to see how an increase of capital should fail 
to draw out of the laborers some hitherto dormant 
power. The possible powers in men for the utilization 
of capital are as large and as indefinite as are the forces 
of nature having the power of aiding capital. 

We cannot, therefore, correctly contrast capital goods 
with days' work and say that all production is due to 
them and that the product should be divided between 
them. The true contrast with capital is labor force, 
using the latter term in so broad a sense that it will 
include every natural or human agency making capital 
productive. Viewed in this way labor force is abstract, 
capital goods are concrete. Labor force yields a differ- 
ential return ; the return on capital is marginal. Some 
of these units of labor force, when combined with capital, 
are very effective ; others are less so, while still others 
increase but little the effectiveness of the capital em- 
ployed with them. There are thus marginal units of 
labor force that yield no additional return. The return 
on other units is measured by their additional return just 
as the rent of good land is fixed by marginal land. In 
fact the case of land is but an example of the difference 
in the effectiveness of the units of labor force connected 
with it. With every increase of capital on land some 
new units of labor force are made effective or have 
their effectiveness increased. 

It can now be seen what the third form of income 
— that which is not interest or wages — is, and how it 



Investments 121 

grows. Labor force is made up of a number of con- 
crete days' work and of a group of substitutes for labor. 
Wherever a natural force is utilized as a substitute for 
labor, or a new utilization of laborers is made not involv- 
ing an increase in their number, the additions to the 
productivity of capital made in this way go to the per- 
sons controlling these forces. This increased produc- 
tivity of capital is valued at the price of the labor for 
which they are substituted. 

From this point of view, rent is the price of labor 
substitutes. They do not increase the price of products, 
because goods made by them have the same price as 
those made by men. The price-fixing articles are always 
those made by labor. The substitutes do not influence 
price, nor are they used at the expense of the laborers 
or of the capitalists. Neither wages nor the interest on 
capital goods are altered. Whoever pays rent increases 
his productive power by the exact amount of rent. This 
superiority is due to the use of some labor force that 
permits him to dispense with laborers. It is to him 
a matter of indifference whether this labor force or 
more laborers are employed. The expenditure of funds 
is the same. It is proper, therefore, to think of the 
fund paid out in this way as wages. It has its value 
fixed by wages, and comes from the same source as do 
wages. The wages fund, when the term is rightly used, 
includes all money paid for labor and for all substitutes 
for labor. 

It is this wages fund, not true wages, that is the fund 
to be contrasted with the interest on capital goods. All 
return from industry is either interest or a part of the 
wages fund. The wages fund in this broad sense is a 



122 The Theory of Prosperity 

differential to interest, which as a return for capital goods 
is marginal. There is thus a meaning to the diagram 
just used, if wages fund be put in the place of wages. 
Rent is wage-determined, but not wages. Thrown to- 
gether, the two make a true differential that stands in 
contrast with interest. 

Changing the point of view, capital goods is made a 
fixed quantity, and labor an increasing quantity. Addi- 
tional labor, in the sense of more days' work, adds a 
decreasing amount to the total product. Labor thus 
becomes marginal, and the marginal return to the labor 
fixes the pay of all laborers. To total wages in this 
concrete sense, all the rest of the income of society is 
the residual. When a few laborers were employed with 
all the capital, the return was great, but it gradually 
decreases as the number of laborers increases. The 
capital goods must be divided among a larger number 
of workmen. Thus their efficiency falls off, and when 
measured at the margin the return to capital, being the 
residual, is differential. Capital in this sense is not 
merely capital goods, but all valuable objects that aid 
labor. Capital goods are important to laborers because 
they increase the efficiency of labor. Anything, how- 
ever, that does this is capital in the sense of aiding 
production. Capital goods are the aids to production 
made by labor. In addition to these there are many 
aids to labor not made by it, of which land is an example. 
The forces and material embodied in it aid workmen, 
but are not made by them. Contributions are also 
made by many artificial things. Corporations, fran- 
chises, laws, customs, rights, moral qualities, peculiar 
abilities, whether natural or acquired, and a great 



Investments 123 

variety of other objects, qualities, and forces, contrib- 
ute more or less to the output of goods. In so far 
as they do, they are valued by the income they create, 
and become a part of the social capital. All these 
must be put with capital goods to make up the social 
capital whose income is the residual to the sum of 
wages. Each additional laborer adds something to 
the value of this social capital if his presence forces 
down the margin of production. Some of the income 
that went to other laborers is now taken from them, 
and increases the incomes of holders of land, fran- 
chises, or other valuable rights. The marginal capital 
is not capital goods, but some of those artificial objects 
that become capital through the income they absorb. 
To withdraw labor does not mean to throw capital 
goods out of use ; it may mean merely the destruction 
of social capital by taking away its income. Some 
land, franchise, or right becomes less capital, or ceases 
to be capital because it yields no income. 

Capital as a differential to labor is all social capital — 
the whole field of investments. It includes not merely 
productive capital goods, but also all sources of income 
at their capitalized value. Interest proper is the return 
on capital goods. The interest fund is much more than 
this amount. It includes the income of all objects meas- 
ured by the rate of interest. The income of a railroad 
corporation or of a street railway — no matter how much 
the stock is watered — belongs to the interest fund. 
The value of this stock is determined by the rate of 
interest, and so also is that of any other income that 
may be funded. 

It is this interest fund in its entirety that is the 



124 



The Theory of Prosperity 



residual, and hence the differential to the total sum 
of wages. Concrete wages is marginal; to this fund 
all interest and all income whose sources are valued 
through the rate of interest is a differential. Interest 
proper, that is, the return on capital goods, is also 
marginal; to this fund all the income derived from 
labor force considered as an abstract quantity is a 
differential. These two points of view presented in 
diagrams appear as follows : — 



FIG. XVII 




In the first diagram the whole number of concrete 
days' work is contrasted with the income derived from 
the whole field of investment. In the second, the 
income derived from all capital goods is separated from 
that coming from the whole labor force, whether natural 
or human. The interest fund in the one is more than 
the interest in the other. So, too, is the wages fund in 
the one more than the wages in the other. There is 
a fund not interest or wages in the concrete sense that 
is present in both differentials. The hidden difference 

Interest fund — interest = wages fund — wages. 

on both sides of the equation is the funded income of 
society or rent. Rent is wages in the sense that it is 
measured by the amount of labor it displaces. It is 
interest in the sense that its source is valued through 



Investments 125 

the rate of interest. This source is a thing, and hence 
capital to the investor. To the producer it is a force, 
and hence labor or a labor economizer. Each sees it as 
a part of the other agent in production, because it must 
be bought and paid for as if it were a part of this 
contrasted agent. Rent is not an item of expense to 
either capitaHst or laborer. All goods have their prices 
fixed by units of supply on which no rent is paid. It 
is no wonder, therefore, that rent is overlooked or seems 
a part of other funds. 

When two quantities are contrasted so as to make 
one marginal and the other a differential, the one con- 
sidered marginal is made up of concrete units, while the 
second is composed of discrete or abstract units. Capi- 
tal goods and laborers are concrete. Investments, land, 
and labor force exist in a multitude of diverse forms. 
The wages of laborers cannot become a differential to 
the return on capital goods, nor can the reverse be true. 
Each of these concrete objects must be contrasted with 
an abstract unit made up of all the remaining forces 
and agents of production. Units of this latter kind are 
the only ones that form a true differential with concrete 
capital or labor. When capital goods are considered 
marginal, laborers are among the objects grouped to- 
gether to make the opposing abstract unit. Capital 
goods, also, are a part of the group of discrete objects 
contrasted with labor as a m.arginal quantity. But in 
neither case is the concrete element in the differential 
its only constituent. Many diverse objects are put in 
with it so as to create the grading needed for the 
differential. Two concrete sources of income cannot 
be differential to each other. If two or more concrete 



126 1 Jie Theory of Prosperity 

agents, acting without external aid, produced income, 
the return from this production would be constant and 
hence there would be no differential. 

Under the simple conditions of a stationary society, 
labor and capital do not change in amount nor are they 
utilized in new ways. There are no dynamic changes, 
all disturbances and friction disappear, competition be- 
comes general, and labor and capital are mobile. The 
standards thus created are said to be normal or natural. 
Each commodity, it is held, sells for enough to pay the 
usual rates of wages and interest and for no more. 
There is then no net surplus, no residual, nor any 
funded income, for an investment could not rise in 
value above the value of the capital goods used in it. 

Profits as they appear in dynamic society are the net 
gains of the industrial managers who invent new pro- 
cesses or organize their laborers more efficiently. So 
long as these inventions and methods are not generally 
known, those introducing them get a profit above the 
usual return, but this profit tends to disappear as other 
managers gradually make use of these inventions or 
processes. But as they do, new inventions and methods 
are introduced by the more enterprising. Profits of this 
kind are pecuHarly dynamic in nature. They come 
only with progress, and disappear when the results of 
progress are utilized by the pubHc. Plainly these 
profits would cease in static society, and no new ones 
would be created. There seems, therefore, to be no 
need of considering anything but wages and interest. 

This conclusion, however, is not correct. The profits 
of which mention has been made are those of falling 
prices due to improved processes. When improve- 



In vestm ents 127 

ments cease, these also cease. But there are gains due 
to rising prices, and these do not disappear in a static 
society. The gains of managers are of two kinds — 
inventors' gains due to falhng prices and promoters' 
gains due to rising prices. Inventors watch the rela- 
tion between men and nature, and take advantage of 
any possible adjustment. Promoters watch values. 
They foresee upward tendencies in prices either relative 
or absolute, and take advantage of the conditions creat- 
ing rising prices to fund the income coming in this way. 
These advantages will not be taken away in a static 
society. They are perpetuated, hidden in forms that 
make them seem to be capital. The presence of funded 
income, however, can be tested by comparing the value 
of total investments with that of the total capital goods. 
There is funded income if the former exceeds the latter. 
In a static society rent, profit, and funded income are 
the same, and their name is a matter of indifference. 

Funded income or rent stands in direct contrast with 
wages. A fall in wages gives an increased value to 
objects that labor uses in production, and causes an 
increased flow of income to their owners. This income 
remains in their hands until a rise in wages takes it 
away. There being nothing in a static state to create a 
rise in wages, it would continue as rent, and be enjoyed 
by others than capitalists and laborers. The third form 
of income is never absent even in a static state. 

Suppose the income of a society to be equal to the 
figure abed of which abce is wages and ecd is interest. 
If the rate of wages falls through an increase of work- 
men, the return would now equal the area ahgd, of 
which ahgf ^NOxAdi. be wages. There is now a new area 



128 



The Theory of Prosperity 



ecfg. Will it go to the holders of capital goods as 
interest ? No. If labor and labor products have fallen 
in price, some other objects must have risen in price, or 
labor and its products could not have fallen. Capital 
goods being made by labor cannot rise in price when 
labor falls, unless there is some lack in the mobility of 
labor, for mobile labor being free to move in any direc- 
tion would flow from industries making consumption 
goods to those making capital goods, if the latter rose 
in price. The owners of capital goods are, therefore, 
prevented from obtaining the income ecfg for the same 
reasons that the laborers are. Capital goods are a 



^^^ — -^_^^ 


FIG. XVIil 




^^^~^^^__ 







function of labor. Where labor is mobile they must 
fall and rise in price together. This new income must 
go elsewhere. It is funded by those who foresee where 
prices are to rise, and the securities they create become 
a part of the permanent investments of society. 

Let it be assumed that the quantity of capital is 
limited, and that the number of the laborers is increas- 
ing. In this case the wages of the laborers would de- 
crease as their number increased. If the return when 
one laborer used all the capital is twenty units of goods, 
thirty units when two laborers used it, thirty-nine for 
three, forty-seven for four, fifty-four for five, and sixty 



Investments 



129 



for six laborers, the following table would represent the 
division of the return, C standing for the amount of capi- 
tal and L for a unit of labor. 













100 units of 


Inducement 


No. of 
laborers 


Product 


Pay per 
laborer 


Total wages 


Amount left 
for capital 


present goods 
produce in 
future goods 


to increase 
capital 
goods 


I 


20 












2 


30 


10 


20 


10 


no 





3 


39 


9 


27 


12 


112 


2 


4 


47 


8 


32 


15 


115 


5 


S 


54 


7 


35 


19 


119 


9 


6 


60 


6 


36 


24 


124 


14 


7 


65 


5 


35 


30 


130 


20 


8 


69 


4 


32 


37 


137 


27 



It should be noticed that the share assigned to capital 
is not determined positively but negatively, by attributing 
to it all that cannot under the conditions go to the labor- 
ers.^ They get an amount equal to the marginal return 
multiplied by their number. But can all this residual 
go to the holders of capital goods, and if they do get 
it, can it properly be called interest.'' When two labor- 
ers use the capital, the return on it is 10 units ; when 
six men use it, the return is 24 units. This larger 
return on each unit of capital goods could not but 
increase its value. If the capital goods that produced 
the ten units were worth, in the first case, 100 units of 
consumption goods, they would be worth at least 240 
units of consumption goods, when the return on them 
is increased to 24 units. Production goods would be 
worth unit for unit more than double what consump- 

^ See Professor Clark's reasoning on page 330, " Distribution of Wealth." 
K 



130 TJie Theory of Prosperity 

tion goods are, although they are produced by the same 
amount of labor. Each unit of capital goods must be 
replaced by labor. More capital goods and less con- 
sumption goods would be made, if the price of the 
former rose while that of the latter fell. 

The additional labor can be applied at the margin of 
production, or it can be used to create additional capital 
goods. There is no law of diminishing returns checking 
the increase of capital goods. If the return for capital 
rose above the ten units, the additional labor would be 
wholly applied to its production. No labor would be 
applied at the margin until the return on capital fell 
again to ten units. If, when this happens, some labor 
is still unemiployed, a part of it will be applied at the 
margin and the rest to the production of capital goods. 
It should be borne in mind that capital and labor can 
be partially substituted for each other. An increase of 
capital, other conditions remaining unaltered, leads to 
the substitution of some capital for labor, and thus tends 
to reduce wages. An increase of labor will likewise 
substitute some labor for capital, and thus tend to re- 
duce interest. After the quantity of labor is increased, 
the equilibrium is not restored until more capital is 
created. After an increase of capital, some labor is 
displaced before the two can come to an equilibrium. 
Under static conditions, therefore, a fall in interest or 
wages results in a fall in both. The losses from these 
two funds would be the gain of the holders of funded 
income. . If additional labor applied at the margin of 
production gives decreasing returns, there exists some- 
where a lack of the power of substitution, and those 
owning resources where this power fails have a valuable 



hives intents 131 

monopoly. Diminishing return creates an income that 
is neither wages nor interest. The failure of the power 
of substitution here or elsewhere does not prevent a 
static equilibrium. A society with no other material for 
light than coal oil could be as static as one with twenty 
substitutes for it. On the contrary, the fewer the substi- 
tutes, the easier is it to create a static society. 

Interest is the difference between the value of capi- 
tal goods and those fitted for immediate consumption. 
Capital or future goods gradually ripen into consumption 
goods, and as they do, their value increases. To make 
interest possible, capital goods must have a less value 
than consumption goods. Otherwise the increase of 
their value upon which interest depends could not take 
place. If, then, capital goods have a higher value, unit 
for unit, than consumption goods, the income derived 
from it is not interest. It is some kind of funded 
income and must be rent or profit. If a corporation 
has capital goods that as consumption goods would be 
valued at one million dollars, and they acquire a value 
of two million dollars because of the income they bring 
to the corporation, this income is partly rent. Every 
corporation, the value of whose stocks and bonds is 
more than that of its capital goods, has funded income. 
If then the income from capital increases from 10 units 
to 24 units through an increase in the number of labor- 
ers, this extra income is not interest. It is a funded 
income and a sure indication of some monopoly. The 
fact that capital does not increase shows that it is a 
monopoly, or that some disguised limitation exists creat- 
ing a value in other objects. The most slowly increas- 
ing factors in distribution are monopolies, and their 



132 The Theory of Prosperity 

income belongs to the monopoly fund, and not to inter- 
est or wages. If capital, because an absolute monopoly, 
cannot increase, its income is no longer interest. A 
static equilibrium does not remove monopolies, nor can 
it lower the high price of goods that their existence 
creates; nor does society get rid of funded income 
by becoming static. Its amount is reduced only by 
dynamic changes enlarging the power of substitution. 
Every increased power of substitution lowers the price 
of the articles for which substitutes are created and 
thus reduces the amount of price-made income. The 
source of funded income is a low margin of production. 
Only dynamic changes raise this margin, and thus 
transform funded income into wages and interest. 
This transformation a static society is powerless to 
make. In it funded income is fully capitalized, and 
thus the difference between it and capital goods is lost 
sight of. But the difference is there, and the income is 
there, no matter how thoroughly disguised. Rent does 
not fall off except as wages rise. A low margin of 
production means high rents in any society. They 
tend to disappear, not as Professor Clark assumes, 
in a static state, but in a dynamic society, where an 
enlarged power of substitution increases the marginal 
return. In a static society rent endures as a part of 
the old sources of income. There is no force so chang- 
ing prices that it will be transformed into marginal in- 
come. In a dynamic society the older forms of rent 
are steadily changed into wages by the rise of the 
marginal return. Rent persists, but it is derived from- 
new sources of income created by a succession of inven- 
tions, discoveries, and improvements. 



Investments 133 

Ricardo was wrong in assuming that the growth 
of rent is at the expense of profits. He thought that 
a sum of wealth was taken from producers equal to if 
not greater than the amount landlords gain by the 
increase of rent. There is a partial justification of 
this view in the fact that profits were defined so as to 
include the cost of risk. Some of the gains of land- 
lords might be from the funds that fortunate producers 
enjoyed because they escaped the cost of risk. But 
this fund in the hands of lucky producers or traders 
did not represent a net gain to society. There was an 
equal loss to unlucky traders, who paid this loss out of 
their capital. The transfer of this fund to landlords 
means some social or industrial change by which this 
risk was avoided. The fund now becomes for the first 
time a net addition to the revenue of society. It is one 
thing to say that this new revenue of the landlord is 
unearned ; it is a different thing to say that some one 
else is deprived of an income he formerly enjoyed. 
The latter fact must be proved before rent can be 
regarded as a species of exploitation. Rent is a cost- 
less income, not a seized income. It represents some 
change in production by which effort is reduced. It is 
the part of the net gains that go to individuals instead 
of to society. It is nevertheless a social gain and an 
index of increased productivity. 

While the growth of funded income is never a loss 
to the public, one form of rent often grows at the ex- 
pense of other forms. Every change in prices shifts 
from one class to others the part of the social surplus 
that takes the form of rent. If the expense of one 
price-making unit of supply falls while another in- 



134 '^^^ Theory of Prosperity 

creases, there is no net addition to the fund of rent. 
There is merely a transfer of wealth without a social 
gain. The recent fall in the price of agricultural prod- 
ucts released a large part of the rent fund going to the 
owners of land. The recent growth of other forms of 
funded income is largely at the expense of farmers 
owning their own land. But even in this and other 
similar cases there is a net gain as well as a transfer 
of wealth. The lowering of the value of price-making 
units of supply represents some increased power of 
substitution on the part of consumers, or the introduc- 
tion of improved processes of production. The transfer 
of funded income goes hand in hand with changes that 
bring large social gains. It can, therefore, be inferred 
that a transfer of funded income, like its net increase, 
is an index of prosperity. The public properly sympa- 
thizes with the losers, but it does wrong to regret or to 
prevent the change. 
Income as Changes in the flow of income are always due to 

equalized by movements in prices. The marp;inal unit of supply de- 
Natural ^ ^ ^^ -^ 
Law. termines the expense of satisfying each want. When 

its price is determined, each other unit of supply yields 
a rent equal to the decrease in expense. Rent is always 
present in any complex society, disguised, however, as 
a funded income and sold on the investment market as 
though it were interest on capital goods. All invest- 
ments are thus capital to the business world. The 
income from them makes up the interest fund standing 
in direct contrast to wages. Viewed in this way, wages 
are the payment for concrete days' work, which can be 
increased or decreased only by changes in the number 
of laborers. Interest is then the payment for an ab- 



Investments 135 

stract fund of capital made up partly of capital goods 
in the constant process of replacement, and partly of 
the sources of funded income valued at the current 
rates. All these thrown together make a differential 
income to which wages are marginal. 

Where differential and marginal income can be con- 
trasted in this manner, the marginal income represents 
socialized income. Every one participates equally in it, 
since all persons can fulfil the conditions by which it 
is secured. Differential income is unsocialized, or at 
least but partially socialized. Either many persons are 
excluded from it entirely, or it can be obtained upon 
conditions with which but a part of the community can 
comply. There is thus a marked contrast in these two 
forms of income. Where the various means of produc- 
tion are chosen in the order of their productivity, the 
number of laborers determine how many of them will 
be used. The least productive of these fixes the 
marginal wage. All extra return on others is a part of 
the interest fund, and becomes either interest on capital 
goods or a source of rent. If this be so, changes in 
wages affect the size of the interest fund. A rising 
wage prevents the use of the least productive oppor- 
tunities for labor, and cuts down the difference between 
the best and the poorest opportunities. The interest 
fund, being a differential to wages, must now fall off. 
It must, on the contrary, grow if the rate of wages falls. 
The difference between the best and the poorest oppor- 
tunities for labor increases, and with the change the dif- 
ferential income grows. 

Let the base line represent the number of days' work, 
and the return from them be measured by the distance 



136 



The Theory of Prosperity 



between it and the line dg. Then when the number 
of days' work equals the line ab, the area abce will 
represent wages, and the area ecd will represent the 
return on the investments. Increase the amount of 
labor to ah and wages equals the area ahgf, while 
the interest fund grows until it equals the area fgd. 




Reverse the conditions by reducing the quantity of 
labor, or improve them by making the efficiency of 
all the days' work more nearly equal, and the interest 
fund must shrink at least relatively to the whole income 
of society. 

Accepting these well-known facts, investments are 
socialized by any change raising the margin of pro- 
duction, and income is desocialized by any change 
lowering the margin. Little importance attaches to 
the ownership of investments. Their real significance 
comes from the income derived from them. If no 
income went to the owners of property, it would be 
completely socialized, while property is partially social- 
ized by every reduction in its total income, provided no 
reduction takes place in the total product of industry. 
The size of the interest fund thus fixes the amount of 
desocialized income, and this in turn depends upon the 
amount of the differential income. 



Investments 137 

An abstract proposition of this kind has little mean- 
ing unless transformed into concrete form. For this 
purpose, return must be made to the difference between 
interest on capital goods and funded income valued 
through the rate of interest. These two united and 
blended make the differential to wages called the inter- 
est fund. It is paradoxical to say that the interest fund 
is reduced by raising the rate of interest, yet the state- 
ment contains a truth hard to put in any other way. 
Funded revenue being valued through the rate of inter- 
est, a rise in interest reduces the value of investments 
depending upon it. If the rate of interest is four per 
cent, an interest fund of forty miUions, divided equally 
between interest proper and rent, gives to investments a 
value of 1000 miUions. There would be 500 millions of 
capital goods, and an equal amount of other investments 
representing funded income. If the rate of interest 
rose to five per cent, the 500 millions of capital goods 
would retain its value, but other investments would 
fall in value to 400 millions. The total investments 
would be 900 millions instead of 1000 millions as 
before. 

Assume further that the change in the rate of interest 
was brought about by the pressure of a rising rate of 
wages forcing up the margin of production. This new 
adjustment, taking a part of the funded income from the 
interest fund, would give it to the laborer as wages. If 
5 millions of funded revenue was thus transferred, the 
15 millions remaining would be valued at 300 millions, 
reducing the total value of investments to 800 millions. 
It does not follow, therefore, that a reduction of the 
interest fund means a fall in the rate of interest. The 



138 The Theory of Prosperity 

rate may go up while the amount goes down, and still 
the sum of capital goods may remain unchanged. In 
the case just given, 5 millions have been added to wages 
and 200 millions of investments have been socialized. 
The pressure of a rising rate of wages, affecting as it 
does the margin of production, falls entirely upon the 
funded income. Capital goods still get their old return, 
and may even get more than before. 

The process can go on indefinitely in a progressive 
society. The only limit would be the reduction of the 
interest fund until it contained nothing but the return 
on capital goods. But this stage would also involve 
the socialization of interest. Capital goods are made 
and replaced by labor. If there is no obstacle to the 
flow of labor to capital goods, each laborer will make 
his share of capital goods and thus enjoy the income 
derived from them. Interest would then be socialized 
in the sense of being equally distributed. It makes no 
difference what income is called when all share alike 
in its distribution. The ownership of capital is unim- 
portant unless it disturbs the equal flow of income to 
all who participate in production. No one would allow 
another to have a permanent income from capital at his 
expense, when by making certain capital goods this per- 
petual flow of income would be his to enjoy. Owner- 
ship under these conditions would mean the control of 
industry without any special rights to income. 

This ideal result is partly realized in every progres- 
sive society. Rent is due to the high cost of the mar- 
ginal units of supply. Every increase in the power of 
substitution cheapens some marginal unit or puts a less 
costly article at the margin. This particular rent is 



Investments 1 39 

thus reduced, and with the falling off of funded income 
due to it, investments are cut down in value and some, 
perhaps, made common property. Land, franchises, 
corporate rights, and other intangible property serve 
merely as means of directing industry if they give no 
net income to their owners. In recent years the re- 
duced value of agricultural lands has shown how a fall 
in prices can socialize property. Land is now as well 
managed as before, but its income has been to a large 
extent made social through the loss of peculiar advan- 
tages formerly enjoyed by its owners. Many railroad 
corporations through the fall in rates give no income 
to stockholders, and yet they are kept up and often 
well managed. The increased facilities for water trans- 
portation will socialize the income of many more rail- 
ways by forcing down rates. In the same way the use 
of electricity on street railways has socialized a part of 
the income formerly going as rent to the owners of 
houses near the centres of great cities. Large rents 
are now obtained on sugar, oil, and many other raw 
materials, and this income being funded increases the 
amount of investments. But for these articles substi- 
tutes will sooner or later be found, and then this income 
will be socialized just as land rents have been. 

Rent is constantly being created by social progress, 
but in any particular form it is steadily being cut down 
by the increase of the power of substitution. The 
price of foods in England was on an upward curve for 
over a century — from 1757 to 1873. So long did this 
state continue that the rise of the price of food and of 
the rent of land came to be regarded as a condition 
of nature. Many a theory based upon these supposed 



140 The Theory of Prosperity 

facts fell to the ground when substitutes for the staple 
English foods were found. So will it be with predic- 
tions of the permanence of any particular form of rent 
It must disappear if society continues progressive. 
Rents like profits are temporary. The difference is in 
the length of time that rent curves persist beyond 
similar movements in profits. The power of substitu- 
tion acts in both cases, but more quickly with profits 
than with rent. 

All differentials then are rents. A low margin of 
production means high rents. A rise of the margin 
cuts down rents and socializes the income formerly 
flowing into this fund. The converse is equally true. 
There is no way to socialize income but by raising the 
margin. If the standard of life is low, and the pro- 
ductive power of labor is small, investments are large 
in amount, and the revenue derived from them gets to 
the public only through special qualities not possessed 
by the many. There is a public for investments, but it 
is only a fraction of the whole people. To improve 
present conditions means not to seize funded income or 
to transform it into some new fund, but to reduce its 
amount. An increased power of substitution is the 
only remedy for an unequal distribution of wealth. 
This may come slowly, but it will come, and with it will 
be a rising margin of production changing rent into 
wages. In the solution of the wages problem lies the 
only hope of eliminating rent. 

It is now possible to bring the contrasted views of 
production into more coherent relations to each other. 
The laborer's viewpoint pictures the simple relations of 
an isolated man and his environment. More laborers 



Investments 141 

mean more contact with nature, but no marked change 
in the attitude of men toward it. Each workman has 
an equiUbrium to maintain in which his return cor- 
responds to his effort. If his energy can be conserved, 
there is a perpetual round of production. Effort makes 
goods ; goods create utihty ; and utilities are trans- 
formed back into energy. The goal of this progress 
is painless effort through energy that is again and again 
restored by its reappearance as goods and utility. 

This contrast, however, does not exist with a capital- 
ist. He deals with forces and with material which is 
capital and is capable of increase. With capital's 
increase forces are better utilized or the less costly 
is substituted for the more costly. These forces are 
of two kinds — labor forces and natural forces ; the 
former are expensive, the latter are free. There is 
therefore in the mind of the capitalist an instinctive 
opposition to labor costs, which in his opinion are the 
great burden on industry. Every improvement dis- 
pensing in some way with labor, his ideal would be 
realized if all production were carried on by natural 
forces. The capitalist is right in his opposition to labor 
costs and in his desire to create substitutes for labor. 
But the laborer is equally right in demanding high 
wages and an equilibrium between effort and return. 
Both these views are in essence correct, and no opposi- 
tion exists between them if they are worked out in 
detail. Trouble begins, however, when an attempt is 
made to combine them into one point of view. To 
harmonize them demands, not a combination, but a clear 
recognition of the essential features that each viewpoint 
neglects or obscures. 



142 The Theory of ProspeiHty 

These viewpoints are not radically altered by the 
introduction of the concept of marginal return, but the 
terminology by which they are described becomes so 
similar that it is easy to confuse them. Other condi- 
tions of production remaining the same, an increase in 
the number of laborers reduces wages by lowering the 
marginal return. Under like conditions it is also said 
that an increase of capital reduces interest by lowering 
the marginal return. Where then are wages fixed } 
At the margin. And where is the rate of interest 
fixed .'' The reply is also at the margin. It is then 
assumed that both wages and interest are fixed at the 
margin, and that the marginal return equals the sum of 
wages and interest. 

A closer examination, however, shows that these two 
margins are not the same, and that the two sums, 
wages and interest, cannot be added to form a gross 
marginal return. The laborer strives for an equilibrium 
between effort and return. This return is in the form 
of utilities, and the more goods he has the lower is their 
marginal utility. They supply wants of less urgency, 
and are not worth producing when the marginal utility 
sinks below the effort of production. It is the want 
margin, therefore, that fixes the rate of wages. The 
capitalist, however, has to do with forces and material, 
and these depend upon objective relations. His margin 
of production is the place where the fewest goods 
will be produced for a given outlay. Arrange all the 
opportunities for investment in a series so that the 
more productive come first, and the marginal return 
in goods will be lowered as more of these opportunities 
are utiHzed. The margin of the capitaHst is the goods 



Investments 143 

margin and thus is an objective fact, not subjective rela- 
tion, as is the want margin of the laborer. 

All the return at the want margin can go to the la- 
borer at the same time that all at the goods margin goes 
to capital. The defect in the laborer's viewpoint is due 
to his failure to recognize the difference between pres- 
ent and future goods. Return to him is the result 
of effort, and is measured as soon as the effort is put 
forth. This means that he thinks of return in terms 
of future goods, and his margin is a margin of these 
goods. In this margin the capitalist gets no share. 
His share comes not from an increase of goods, but 
from the increase in the value of certain goods that 
in time ripen into present goods. This additional utility 
going to the capitalist is not a marginal utiHty. It is 
a differential when measured by the marginal want of 
the laborer that he supplies wholly with his own effort. 
At the laborer's margin, therefore, he gets the whole 
return. The capitalist shares only in the additional 
utility created by intenser wants and complementary 
goods. 

At the goods margin, however, — the place where 
the production is least efficient, — all the return goes 
to capital. When viewed as abstract fund, capital is 
capable of assuming a thousand forms, but each capital 
good is in some concrete form and capable of but one 
use. At a given moment all capital is concrete goods, 
each unit of which has a particular end. Additional 
capital is always more of these concrete goods fitted 
for some definite act of production. The marginal 
capital is, therefore, concrete, and must give a fixed 
return on itself or it will not be created and used. The 



144 The Theory of Prosperity 

concrete margin of goods production must yield enough 
to pay the rate of interest on the capital goods used 
there, but in the case of both labor and land there are 
no concrete units at this margin. Each unit of land 
and labor has several uses. Every laborer uses many 
concrete capital goods, and on each acre of land many 
kinds of tools and machinery are employed. The mar- 
ginal capital good has, therefore, in conjunction with it, 
not a whole laborer nor a whole acre, but merely one 
use of a laborer and one use of some land. If a farmer 
puts up a windmill to pump water, he does not hire 
an additional laborer to manage it, but makes a new 
use of some laborer he already has. So also, if he buys 
a new cultivator to pulverize the soil, he does not em- 
ploy more land ; he brings out new uses in the land 
he has. At the concrete goods margin there are then 
capital goods, but only uses of men and land. The pro- 
cess of increasing capital goods continues on each farm 
or in each industry until the marginal return only 
suffices to pay for the additional capital used. 

Instead of the increase of capital bringing labor and 
land toward the margin, it removes them farther from 
it. Only a part of the new capital is used at the con- 
crete goods margin. Much of it is sunk in land or 
used to elevate men, and thus augment their produc- 
tive power. After each increase of capital the goods 
margin is somewhat lowered, and along with the change 
comes a lower rate of interest. But land and men are 
improved. Each acre of land is farther from the mar- 
gin than before. Only a marginal use of each acre is 
at the margin, and for this the capitaHst pays nothing. 
Each individual man through education, increased skill, 



Investments 145 

and better social conditions is also farther from the 
margin than before. His wages are fixed by intermar- 
ginal efforts because they determine the type of men to 
be employed. An increase in capital not only adds 
somewhat to the goods used at the margin, but also 
changes the form of the intermarginal capital. Better 
tools and machinery are used, and to tend them a 
superior laborer is employed. This superior man can 
not only properly tend the better tools and machinery, 
but he can also tend more machinery. He can, there- 
fore, be employed in connection with the marginal 
capital with no more cost than if it were not in use. 
With a fixed number of laborers the capitalist will ex- 
tend the use of capital so long as the whole return at 
the margin is enough to meet the interest charges. 

The whole of the subjective wants margin goes to the 
laborer. Interest is a part of the differential utility 
created by intenser wants and complementary goods. 
The whole of the objective goods margin at the same 
time goes to capital. The laborer is paid out of the 
added return which human efforts give to the forces 
and materials that the capitalist controls. Natural 
forces and material are free goods to the capitalist. 
He uses labor only when it gives an additional return 
beyond these free goods equal to its expense. Wages 
are a differential to the free goods created by natural 
forces and materials open alike to all capitalists. At the 
wants margin, therefore, wages are marginal and inter- 
est a part of the differential, while at the goods margin 
interest is marginal and wages a part of the differential. 
The remainder of the differential in each case is the 
monopoly fund. It is a factor in distribution so long as 



146 The Theory of Prosperity 

the power of substitution is incomplete and prices 
fluctuate so that there is a market problem independent 
of the problems of value and production. 

It is proper to say that the marginal urgency of 
human wants determines the rate of wages, but it is not 
correct to affirm that wages are fixed at the concrete 
mxargin of goods production. On the contrary, as this 
concrete margin is lowered the rate of wages rises. 
With each fall of the margin, because of the increase 
of capital, men as individuals move farther from the 
margin and get more wages. Wages go up through the 
same causes that lower interest. Any movement of 
capital toward the margin is sure to transform a part 
of it into forms that improve and develop the industrial 
qualities of laborers. It is the marginal capital that 
fixes the return on all capital, but it is not the marginal 
laborer that fixes the wages of other laborers. Capital 
moves toward the margin. Labor moves from the mar- 
gin. Each lower class of labor has its wages fixed by 
the class above it. The strongest of each class tends 
to move into the class above, and they keep the wages 
of each class near enough to that of the higher class to 
prevent an exodus of the better workmen. It is, there- 
fore, the maximum productivity of workmen that deter- 
mines wages. Whenever a new maximum is set by 
any class of workers, all other workmen are brought 
into direct relation to the new standard, and their wages 
deviate from this level by the expense and trouble 
involved in the transfer from other classes to it. 

A new labor level raises all workmen, just as a new 
kind of agriculture leads to the improvement of all 
land. The best workman and the best land set the 



Investments 147 

pace for all men and land. Changes are no sooner 
introduced than modifications of skill and of agriculture 
become apparent in every section of the industrial 
world. It is not the man most easily dispensed with, 
but he who is least easily dispensed with, that fixes the 
rate of wages. It is also the best land, not the poorest 
land, that determines the value of land. Each workman 
tends to become the best workman and each acre the 
best acre. If the transformation does not take place, 
the difference in the efficiency of men and of land is 
measured by the obstacles to this transformation, and 
the return will differ accordingly. Capital will make 
the transformation if the obstacle is not greater than the 
value of the capital needed to remove it. 

When changes in production come, the starting-point 
lies in the increased pressure of human wants, which 
acts directly on the laborer in the increase of energy, 
and indirectly on production through the increase of 
capital. The increased energy can accomplish more 
through the increase of capital than through direct con- 
tact with nature, where so often the law of diminishing 
returns bars effective action. Then this new capital is 
applied to the improvement of men and land, removing 
them from the margin. There are now for all laborers 
an increase of options and a greater power of substitu- 
tion. A rise in wages follows these changes. It is the 
last link in the series of changes making the higher 
wages an effect of the lower margin of capital. As the 
differences in investments wear away, the return on all 
capital sinks to the level of the marginal capital, but as 
the differences in men and land disappear, all men 
become equal to the best man and all land equal to the 



148 The Theory of Prosperity 

best acre. There can be no other static equilibrium. 
So long as some men or land are not at their maximum 
productivity, capital will be withdrawn from the margin 
and sunk in men and in land. Dynamic changes con- 
tinue until the return on all capital sinks to the marginal 
level, and the return to men and land rises to its maxi- 
mum. Labor and land tend toward the higher level; 
capital toward the lower. The static measure of pro- 
ductivity is therefore the maximum return for labor and 
land and the minimum return on capital. 



PART II 

INCOME AS DETERMINED BY HEREDITY 
A Study of Discontent and its Remedy 



CHAPTER I 

Income as Fixed by Struggle 

The restraints of which people are conscious are Economic 
those that control their actions or such as deny them 
participation in the public decisions. A man wants 
citizenship, choice of action, and the right to control 
property, and these being acquired, he depends upon 
his individual activity for the satisfaction of his desires. 
But this idea of freedom is not fundamental, for the 
essential pleasures and activities being economic, make 
any notion of freedom futile that does not insure the 
possibility of production as well as the power to exist. 

Recognizing these facts, many writers have made free 
land the one essential to economic freedom, arguing 
that coercion is impossible if each individual has a strip 
of land upon which to labor. He can be enticed into 
social cooperation only by offering him more than his 
land produces. Groups of such men have a safeguard 
against usurpation and exploitation, for it would be 
possible to withdraw from a productive group if a pro- 
portionate share of the joint product was refused. In 
this sense free land is not a simple condition but the 
picture of conditions, each of which is in a measure 
reaHzed in primitive societies. The holder of land has 
opportunities for activity and is insured the results of 
his own productivity. He has also ways in which 
to exert himself profitably, and his faculties are stimu- 

151 



152 The Theory of Prosperity 

lated by the variety of his occupations. The results of 
his past efforts are stored up to enable him to have 
leisure, or to enjoy sports and other activities that his 
situation affords. Society or solitude is his as he wants 
it, and there are no indispensable conditions to his 
existence for which he is dependent on others. 

While free land may in this way insure economic 
freedom, it is not essential to it. The conditions it 
creates can be obtained in other ways, and if properly 
formulated may be expressed in simpler terms. They 
are in fact all dependent upon a single condition which 
can be realized under a great variety of circumstances. 
Men on free land may lack it, and men without any 
land often enjoy economic freedom because they have 
it. Labor is free where there is a complete pozver of sub- 
stitution. It is the doing or not doing, consuming or 
not consuming, being active or passive at will, being 
social or not social, that constitutes freedom. Eco- 
nomic freedom is secure where the substitution of activi- 
ties and enjoyments is possible. If a workman cannot 
withdraw from the productive group of which he is a 
member, he is not free, no matter what his income is. 
He must have the right to cease production and the 
power to enter other groups ; nor is a right to support 
necessary. A laborer's own productivity can secure 
a store from which he may subsist while not at work, if 
his liberty of action has not been previously infringed ; 
nor does economic freedom demand that the alternate 
occupations shall be equally profitable. The power to 
secure other work will guard his income so long as it 
is effective. 

In consumption, also, the power of substitution is 



Inccme as Fixed by Struggle 153 

equally necessary. It is the one supreme condition to 
economic freedom involving all others, and no individual 
can maximize his pleasures without taking it into ac- 
count. No one is free who lives on one food, has but 
one form of amusement, or has the form arid time of his 
leisure set for him by his situation or social condition. 
The sources of activity lie in the enjoyments open to 
men, and if the power of substituting one pleasure for 
others is taken away, the loss of liberty is as complete 
as if the freedom of action were denied. The greatest 
of slaves are those held in bondage by their pleasures. 

So long as this power is complete, groups of pro- 
ducers are organized in a natural way, and each work- 
man secures the full product of his labor. He can 
withdraw from a group if it offers less for his labor 
than other groups, or he can retire from production if the 
return is less than that coming from non-economic 
activities. A freeman enters productive groups to 
increase his pleasures. He should always be able to 
withdraw from complex forms of production, and put 
to the test the capacity of the higher civihzation to 
give him more than he obtained from the simpler 
primitive state where a condition of spontaneous activity 
played a more important part. Nations pass naturally 
from the less to the more complex forms of production 
only when the latter give the greater return, their prog- 
ress being tested by the relative increase in produc- 
tivity, a test that should be open to individuals. There 
is a national as well as an individual loss when laborers 
work so long in a direction opposed to their desire that 
the net return in pleasure is. reduced. Economic free- 
dom will prevent this waste and keep the surplus of 



154 *I^^^^ Theory of Prosperity 

pleasure at its maximum ; and it will also give to each 
individual the result of his own productivity and pre- 
vent any aggression or usurpation on the part of 
individuals or of productive groups. 

The group can always test the productivity of any 
member by working for a time without him, thus proving 
that it is to the interest of the group to give each mem- 
ber what it loses by his absence. No one can secure 
more than this amount because the other members will 
in this case refuse to work with him. Each laborer 
would choose that opportunity for labor where the surplus 
of pleasure was greatest, and if his product was wanted, 
he must be compensated, not only for his costs, but 
also for the surplus of pleasure which the possession 
of the commodity brought. If twenty units of pain 
would produce an article giving forty units of pleasure, 
a free laborer would not part with it unless the equiva- 
lent of forty units of pleasure was given him. Forty 
units of pleasure would have forty units of value, no 
matter how little it cost in effort. The value of each 
article would be measured by the loss of pleasure 
which its production caused and not by the pains of 
this production, and thus alternate pleasures would 
determine each other's value. 

It is only under more complex social conditions that 
costs enter as the measure of values. Men must lose 
their economic freedom before the definite relation of 
costs to values arises that is characteristic of slave 
economies, as when a horse is fed oats and worked until 
the energy created by the food is exerted for the good 
of its master, or a slave is put under the lash to make 
him render a full equivalent for the food he gets. The 



tation. 



Income as Fixed by Struggle 155 

same condition prevails where wages are just sufficient 
to keep the workman ahve, forcing him to work from 
necessity and not from choice. Necessity is the 
measure of his return, and this is secured when costs 
and pleasures are equal. Costs therefore mark the lower 
limit of values and become a standard when the exploita- 
tion of laborers is so great that they would be crushed 
out of existence without some material check to its 
pressure. Even here values can be measured in pleas- 
ures, and under all other circumstances they must be. 
Freemen compare pleasures ; only the product of 
inferiors is estimated in terms of pain. 

Under the conditions stated, a simple society of free- Exploi- 
men would grow up with the activity of each person 
determined by his own productivity and the nature of 
his interests. As the complexity of the social organiza- 
tion increased, rules and customs in the interest of all 
would grow up naturally. The egoistic interests of each 
member of the community being in harmony with social 
order, and impelUng an obedience to all regulations that 
furthered the public welfare, other supports of morality 
would prove unnecessary, for self-interest would be 
synonymous with public good. 

In spite of these tendencies to create and perpetuate 
a simple society, it is doubtful if such a society in any 
developed form ever existed, for even in the earliest 
communities there were forms of usurpation and oppres- 
sion, showing the existence of some counteracting forces 
that the previous reasoning has not recognized. The 
lack of economic freedom shows itself in a condition of 
exploitation, in which the power of substitution is cur- 
tailed or destroyed, with the result that the exploited 



156 The Theory of Prosperity 

get less than they produce, while the exploiters get a 
corresponding degree more than their productivity. 

The source of this exploitation is usually found in the 
power, energy, and intelligence of the dominant class, 
which, we are told, profits by the grinding down of the 
weak and helpless to a condition of poverty, rendering 
them unable to withstand the aggression of their supe- 
riors, the exploiters, who hold the political power and 
use it for their own ends. It is claimed, therefore, 
that there is no hope of economic freedom until the 
power of the ruling class is curtailed and the doctrine 
of political equality asserted ; and to cover the weak- 
nesses of this argument, the source of exploitation is 
also said to be found in property differences, the lack 
of capital disabling laborers in conflict with their em- 
ployers, and compelling them to accept a minimum 
wage barely sufficient to sustain life. 

These and similar explanations are plausible so long 
as the attention is centred on the motives and actions 
of the exploiters ; but why does the exploited consent 
to the exploitation } This question increases in diffi- 
culty when we recall the fact that the number of the 
exploited is much greater than that of their oppressors. 
Two men might compel one man to work for them, but 
even then it would probably be more for their interest 
to work for themselves, as their own productivity would 
be greater than that of their slave. But granting that 
they would prefer ruling to working in this case, it is 
not typical of the common forms of exploitation. 

Not among laborers only is the phenomenon mani- 
fest, but among all classes of society, for everywhere 
people are working for the continuation of social con- 



Income as Fixed by Struggle 1 57 

ditions that deny them the full return of their labor. 
A typical example is the case of women, who, as a rule, 
not only get less than their full productivity, but are 
ardent opponents of the very changes by which the 
return for their labor would be secured. When we 
reflect also upon the fact that opposition to economic 
independence and equality is not confined to the lower 
classes, where it might be expected, but is characteristic 
of those who have adequate power to make all desired 
changes, we realize that the phenomenon is too general 
to be explained by the greed of oppressors. 

An egoistic society could be maintained if primitive 
men always remained in the same environment and 
were not subjected to outside influences. At least it is 
in such societies that these tendencies come out most 
clearly and continue for the longest time. Isolated 
communities and mountainous regions difficult of access 
furnish the best example of societies moved mainly 
by egoistic principles. Such societies usually break 
down or are transformed into different societies as 
soon as the isolation ceases or new ways and goods 
are introduced. This inductive proof that simple 
societies are due to the continuation of the same 
environmental conditions is strengthened by deductive 
proof as soon as the nature of environments and the 
effects of changes are investigated. In a simple envi- 
ronment a system of morality grows up that helps the 
inhabitants to adjust themselves more fully to it. I use 
the term morality in the broad sense of earher usage, 
including all customs, traditions, habits, laws, and insti- 
tutions created by men for their mutual advantage, the 
reacting influence being moral as contrasted with purely 



158 The Theory of Prosperity 

physical agencies. In morals, then, are included all use- 
ful rules and regulations that help men in increasing 
their pleasures and in lessening their pains; all adjuncts 
to the process of maximizing pleasures. The more 
moral the community the greater is the harmony between 
it and those external forces upon which welfare and sur- 
vival depend. Thus egoistic tendencies force men and 
societies to become moral, and in a simple long-enduring 
environment there would grow up laws, habits, and tra- 
ditions, by means of which the well-being of men is kept 
at its maximum. When, however, this community 
changes its environment, it is in an anomalous position. 
It has a code of rules created by one environment and 
a group of needs and activities prompted by another, 
with the result that the forces of the two environments 
are not in harmony. The traditional code of the first 
environment impels the people to act as though they 
were still in it, while the new wants and motives in har- 
mony with the second environment demand for their full 
utilization actions and conduct that in the old environ- 
ment were plainly injurious and hence immoral. If the 
traditions of a nation could be readily changed, this diffi- 
culty would disappear, as a new code would be created 
in harmony with new conditions, through which an 
adjustment to the new environment would be worked 
out. But there are powerful obstacles to these changes ; 
the various parts of a traditional code depend for their 
vitality not merely on egoistic motives but also on psy- 
chic and physiological principles. Imitation is quite as 
powerful in the continuation of habits and customs as 
are the original motives creating them, for men do 
readily and easily what they are accustomed to do. 



Income as Fixed by Struggle 159 

When habits are formed, succeeding generations con- 
tinue them with Uttle examination into their causes and 
purposes. Motor reactions are created impeUing people 
to follow in the activities of their ancestors, and these 
motor tendencies continue after the situation is so 
changed that other forms of activity are more advanta- 
geous. Particular kinds of food, clothing, and climate 
make physiological modifications in the inhabitants of a 
region so that they are adjusted to these conditions and 
suffer severely if they are compelled to change their 
location, seek new food, and encounter new difficulties. 
Each new situation thus forces men to cease certain 
habitual imitations, to discontinue certain motor reac- 
tions, to stop using certain foods, and to make other 
changes out of harmony with their psychic and physio- 
logical impulses, thus continuing an everlasting strug- 
gle between men's egoistic motives and their acquired 
psychic tendencies. 

It is this state of affairs that makes the social forces 
in a second environment different from what they were 
in the first environment to which a race became adjusted. 
Simple egoistic tendencies would create the original 
adjustment and the code of morals that resulted from 
it. But in the second environment the imitations, motor 
reactions, and physiological changes resulting from the 
first adjustment interfere with the free play of the 
egoistic forces of the second environment. Each new 
environment would naturally create a new morality fit- 
ting new conditions. Now, if environments and codes 
of morality began and ceased together, that is, if the 
duration of environments and codes of morality were 
the same, the egoistic forces of each epoch would have 



i6o The Theory of Prosperity 

free play, and simple economies would prevail even in 
the most complex civilization. But environments fol- 
low one another rapidly, while moral codes are modified 
with difficulty. There are no forces to keep men in an 
old environment if their interests impel them to leave 
it, while the same interests cannot force men as readily 
to set aside a code of morality which certain psychic and 
physiological forces keep in its place. Environments, 
therefore, change more easily and have less duration 
than the moral codes they create. The social phe- 
nomena of societies that have passed through many 
environments are, therefore, different from those of 
simple societies created by early conditions. 

As can be seen, these facts have important effects on 
the mental attitude and productivity of men. They be- 
come satisfied with the environment, to which they have 
become adjusted, and, pleased with their traditions and 
institutions, they adopt an optimistic attitude toward 
everything essential to their present welfare. If in any 
way they are in touch with an outside environment better 
than their own, they acquire a dislike for those goods, 
habits, and modes of living not in harmony with their 
own regions. Further, each region loses by death or 
migration those not suited with its conditions, and thus 
the traditions and customs of the region not only make 
men pleased with what they have, but make them dis- 
like what they do not have. 

These inclinations and prejudices are useful so long 
as the environment continues. But when the race 
moves to a better region or the locality is improved by 
the introduction of new methods of production, the 
people have a distaste for the pleasures and activities 



Income as Fixed by Struggle i6i 

that the new conditions favor. They strive to continue 
the conditions and mental attitude of the old environ- 
ment, and aided by tradition and the psychic reactions it 
has created, they live on in the new environment with- 
out the changes that their egoistic interests prompt. 
More is produced than the habits of the community 
permit it to enjoy, and so in order to prevent waste a 
more complex form of society is superimposed. 

These, then, are the social conditions favorable to ex- 
ploitation. One class has more than it wants or at least 
more than its social customs and traditions permit its 
members to enjoy. The extra productivity of the new 
environment is not regarded as a benefit, for it tends to 
break down inherited customs and to introduce extrava- 
gance, luxury, and dissipation. The moral tone of the 
community is opposed to this extra productivity, and its 
exponents strive to force the nation back into the old 
conditions with reduced productivity, or they suggest 
means of expending this extra income in ways not op- 
posed to estabhshed usages. Such a nation offers an 
alluring object for conquerors, who appropriate this 
new surplus without encountering much opposition 
from the conquered, for they do the community a ser- 
vice in maintaining the old morality; while the con- 
quered remain satisfied, or at least passive, so long as 
the oppression of their rulers does not reduce their eco- 
nomic welfare below the limit insured them under the 
old conditions. 

The motives and conditions bringing races into con- 
tact with one another and creating mixed societies are 
complex and in many cases difficult to trace. I am 
seeking not for them, but for the causes explaining 

M 



1 62 The Theory of Prosperity 

the voluntary subjection of conquered races. If exploi- 
tation did not come naturally, it could not come at all, 
or at least it could not continue for any length of time. 
But when certain forces work to prevent a people from 
enjoying the full return for their labor, these forces sup- 
plement the interests of conquerors and help to create 
social conditions promoting exploitation. Early systems 
of morahty inculcate a spirit of resignation and asceti- 
cism, and create an optimistic tone that makes present ills 
bearable. Certain doctrines, such as that new forms of 
consumption are luxuries and indulgence in them is not 
only immoral but sinful, help to adjust a people to an 
environment, and become the necessary means of mak- 
ing them content with a bad situation. Primitive races 
could not exist without such doctrines, but when a better 
environment is entered, they are checks to its full enjoy- 
ment, and are ready means of fastening upon a nation a 
dominant class which consumes the extra produce re- 
jected by the moral code of the subject class. 

Exploitation is thus not a phenomenon of retrogres- 
sion, but of progress. It is the natural consequence of a 
movement from a poorer to a better environment during 
the period when the free play of egoistic forces is pre- 
vented by the code that helped the people in their adjust- 
ment to the earlier environment. The real source 
of exploitation lies not in political causes nor in com- 
petition, but in old traditions, habits, and prejudices. 
Had not antecedent conditions created contentment in 
bad environments, exploitation would be impossible in 
better situations. Political power may continue what 
tradition has created, but it cannot take more from a 
subject race than the new environment adds to their pro- 



Income as Fixed by Struggle 163 

ductive power. The causes of exploitation antedated 
the conquest and are not even strengthened by it. In a 
primitive society, for example, a band of roving men 
could capture and hold wives secured from neighboring 
tribes; but this fact does not account for the ready 
manner in which women submit to exploitation ; for if 
they in the earlier social state had not been accustomed 
to self-sacrifice, their opposition to their new condition 
would have prevented the new form of society from 
becoming permanent. The needs of children developed 
self-denial in the earher state in which women were free. 
It was, therefore, the ideas and habits of women, and not 
the power of men, that induced them to accept the new 
situation, gave to men the increased productivity arising 
from the new social state, and helped to perpetuate 
psychic reactions and physical peculiarities that the new 
conditions could not have formed of themselves. 

For each animal, man, or society the environment is Adhesive 
not all nature but a definite group of objects, the pres- adjustment, 
ence or absence of which affects the immediate welfare. 
Adjustment then means the utilization of a few concrete 
objects upon which survival depends. Each plant can 
exist only in particular soils ; insects die if deprived of 
peculiar sorts of food ; a cow needs food, but it must be 
in the form of grass ; the lion, the polar bear, and the 
bison thrive only in regions with peculiar climate; men, 
too, at given stages of progress demand particular kinds 
of food, need certain forms of shelter, and are confined 
to places with given climates. Food, clothing, shelter, 
and other necessities are derived from the present sur- 
roundings of men, and their activities must be directed 
to their acquisition. Through these goods happiness is 



164 The Theory of Prosperity 

attained and evils warded off. Adjustment under these 
conditions becomes a process of getting goods or of 
avoiding evils. Certain foods and other conditions of 
welfare become so essential that men narrow their ac- 
tivities to get them. When a struggle begins for their 
possession, the increased adjustment to the general con- 
ditions of nature is lost sight of, and survival depending 
on the acquisition of local goods, traits are developed 
that aid in the appropriation of these articles or places ; 
and those customs and habits become necessary that 
help men to make better use of local goods. For each 
habit and custom there is an environmental cause, 
the supremacy of which compels men to act in harmony 
with its demands. Independent, self-prompted activity 
creates a breach between the individual and the local 
sources of his food and other necessities, making him 
liable to the danger of displacement by those who ad- 
here more closely to local conditions. 

In each isolated region men survive by the very close- 
ness of their touch with nature, because for each local 
peculiarity some mode of action is devised by which its 
good is secured or its evil avoided. Men in this stage 
of development have a peculiar fondness for rules of 
thumb which meet the requirements of the field of 
observation, no generalization being carried farther 
than individual verification makes possible. A multi- 
tude of these local rules grow up, hemming in the ac- 
tivity of men and shaping it to the needs of the 
locality; rules which solidify into traditions that are 
hard to break from and which hold each person to the 
region in which he was born. If, however, compelled 
by stress of circumstances to leave home, he settles 



Income as Fixed by Struggle 165 

in some new region and localizes himself as completely 
as before. In this way men have gradually wandered 
over all the earth, never rising in thought above the 
essentials of existence. They may become keen ob- 
servers, but always lack the power of generalization 
which would free them from the tyranny of local 
conditions. 

This adhesive adjustment must have existed many 
ages to have produced the mental traits that have per- 
sisted so long and from which most races have not been 
able to depart ; but closely following or perhaps coinci- 
dent with it is another form of adjustment, through 
which men form themselves into groups by which ob- 
stacles are surmounted, protection is secured, or goods 
are increased. Families, tribes, clans, and nations are 
formed, and the motives developed by which they are 
held together. All social organizations are parts of 
a cohesive adjustment; the church, the school, the 
army, the club, the trades union, — all get their force 
and their utility from the social bonds existing among 
their members. The cohering group has many advan- 
tages over isolated individuals, and can thus control 
favored localities, or reach out farther in search of food 
without breaking home connections. 

There must have been ages of a fortuitous adjustment 
when merely accidental circumstances determined sur- 
vival ; ages in which men lived on what they found, and 
moved from place to place to secure the irregular sup- 
plies of food furnished by chance. The fickleness of 
character, the arbitrariness of notions, and the love of 
gambling and change, so commonly found even in civil- 
ized men, are abiding marks of this stage. An adhesive 



1 66 The Theory of Prosperity 

adjustment follows this, or at least arises from condi- 
tions much more stable, such as a local food supply of a 
kind capable of preservation. Definite settlements are 
then possible, and with them begins the growth of that 
incHnation to cling to soil and place that accounts for 
the characteristics of an adhesive adjustment. 

Of this stage history gives us but an incomplete 
account, as the people belonging to it did not write 
histories; nor is their life made up of striking events, 
as is the case with the struggles and conquests incident 
to a cohesive adjustment. It was probably at its best 
just before the dawn of history, when the desirable parts 
of the world were filled with closely aggregated but 
slightly connected groups of individuals, at a time when 
tradition and imitation were at their maximum ; a time 
when it was not Hkely that such disturbing elements as 
the struggles and dominance of cohering nations were 
introduced. Illustrations of adhesive adjustment are 
furnished by the village communities of India and China, 
where the earlier conditions seem to have continued 
with scarcely any modification; but in all civilizations 
remnants of this stage exist, and from the conditions it 
gave rise to come many of the popular ideals of the pres- 
ent time. The independent farmer, the mountaineer, 
the peasant proprietor, the small trader, the free artisan, 
and other types of isolated producers have the dominant 
traits of an adhesive adjustment. From Aristotle to 
the present time these types have been idealized. The 
freedom and independence of adhesion have been placed 
above the efficiency, energy, and comfort of cohesion. 

An adhesive adjustment is concrete, and puts each 
person in direct relation to the local situation upon which 



Income as Fixed by Struggle 167 

his happiness depends, and from which his pains arise. 
He needs or must avoid particular objects, and the hav- 
ing or avoiding these determines his welfare. Adhesive 
morality thus consists of rules derived by observation 
from this local environment, where each necessary ob- 
ject is the source of one or more rules of thumb that 
become embodied in local customs. Actions suited to 
them become fixed as habits which through imitation 
descend from generation to generation. Selfishness is 
a product of these conditions. Where the environment 
affords but a bare living, the individual energy can be 
sustained in no other way, for each individual must have 
a certain amount of nutriment to enable him to live. 
There are fixed limits above and below which the 
amount of food cannot vary without so serious an injury 
to the individual that his power of survival is impaired. 
Under-nutrition causes starvation, leads to disease, inten- 
sifies struggle, and forces to the wall those whose effi- 
ciency is too sHght to cope with existing competition. 
It acts, therefore, as an elevating force by cutting off 
the less productive part of each struggling community. 
Over-nutrition has equally important effects, for persons 
who indulge too freely lower their vitality and become 
subject to peculiar diseases and vices. Dissipation and 
over-indulgence are as potent in cutting off the more 
productive class as under-nutrition is effective in cutting 
off the less efficient. There is thus a natural force cut- 
ting into society from above as well as one cutting in 
from below, subjecting both the strong and the weak, 
the rich and the poor, to pecuHar difficulties from which 
the normal person is practically exempt. 

It should be noticed that the path of progress lies 



1 68 The Theory of Prosperity 

along the line of complete nutrition ; each person must 
reach this line in order to live, but all who cross it are 
eliminated by dissipation and degeneration. The only 
road to progress, therefore, lies through such modifica- 
tions of the consumption of individuals as to render 
their fullest endeavors just sufficient to secure complete 
nutrition. Each change in the productive power must 
be accompanied by a corresponding change in consump- 
tion, or the field of under-nutrition or over-nutrition is 
entered. To such a state of things there is but one 
outlet — and that outlet is vicarious consumption ; in 
other words, if a man gets pleasure in the welfare 
of others and seeks in this direction an outlet for his 
surplus energy, he avoids both over-nutrition and under- 
nutrition. In competition with others he survives be- 
cause of his greater energy, while in the consumption of 
what he has produced, he is saved by his greater altru- 
ism. A man becomes normal to these new conditions 
only by doing more for his companions and using his 
energy in their behalf. Surplus energy thus finds a 
social outlet, and is the base upon which social relations 
rest. If productive power is increased, external inter- 
est must grow, or the individual ceases to be normal 
and becomes liable to displacement through dissipation. 
Altruism is thus the complement to increased productiv- 
ity and must grow as energy and vitality increase. 

To put this truth in a reverse form, each increase 
of altruism leads to some form of asceticism, by which 
individual wants are reduced and simplified, or to a 
greater display of energy through which the goods 
needed for the welfare of others may be supplied. In 
early societies, with harsh external conditions, social 



Income as Fixed by Struggle 169 

progress thus depended on asceticism, on which stress 
was laid in all early moral codes because in this way most 
of the surplus was obtained. In later times, where the 
environing conditions have become more favorable, men 
seek through an increase of energy to secure the funds 
needed to supply their unselfish impulses. The growth 
of temperance, public libraries, good roads, concerts, 
and art galleries are signs of the pressure which inex- 
clusive consumption is exerting on all men who remain 
normal under the better conditions of modern societies. 
It is easier to do more for others than to repress 
individual desires, thus creating a gospel of activity 
which in a large measure displaces the old ascetic code. 
Altruism is thus a normal product of a cohesive society. 
The struggles which promote cohesion force nations 
to break away from local conditions and transform 
them into a dominant element in the more complex 
societies that follow conquest. Through exploitation 
or through an increase of productive power, a larger 
income passes into their hands, an egoistic use of which 
would lead to dissipation and degeneration. A flow 
of income is thus started from the dominant to the 
dependent class instead of, as is the case in an adhesive 
adjustment, from the dependent to the dominant. Al- 
truism begins as a love of others within a group. The 
father who supports wife and children has an element 
of altruism in his nature, even if he follows a rule of 
selfishness in his deahngs with others. A feudal lord 
who supports a thousand retainers is altruistic even if 
he is brutal to outsiders, for he promotes cohesion by 
a flow of income from himself to them. An aristocracy 
is also generous to the weaker of their class, although 



I/O 



The Theory of Prosperity 



they may be very exacting of outsiders. The same 
tendencies show themselves in all cohering classes 
or groups. Within the group there is always a flow 
of income from the stronger to the weaker; but for 
this partial equahzation of income the group would 
soon fall apart, the strong sinking into dissipation 
through the superabundance of income, and the weaker 
being forced to the wall or compelled to sacrifice group 
interests to save themselves. When the energy and 
forethought of producers are intensified, the flow of in- 
come from the more to the less productive must increase, 
as dissipation is deadly to those who try to spend their 
incomes on themselves. The groups in which men are 
interested become larger and more intense, and with 
this change a larger part of the total income of society 
is set aside for common or at least for less individual- 
istic ends. Hospitals are established; schools are made 
free ; colleges are endowed ; museums, libraries, and art 
galleries receive liberal support; church funds grow, 
and missions are formed at home and abroad ; all these 
and many other activities show the growth of cohesion 
and the flow of income going with it. An energetic 
cohering nation cannot endure except by changing the 
direction of this net flow of income, for it is a condition 
to normal growth and the essence of all progress ; ex- 
ploitation continuing only where abnormal conditions 
have prevented the natural transformation that comes 
through the increase of vigor and efficiency. 

If the causes of exploitation have been correctly pre- 
sented, the conditions for its continuance and ultimate 
removal are apparent. The mental attitude necessary 
to survival and contentment in a poorer environment 



Income as Fixed by Struggle 171 

are the sources of exploitation in a better one. As has 
been noticed, the extra income due to industrial progress 
thus passes readily into the hands of the more progres- 
sive classes, who perpetuate a state of affairs favorable 
to themselves through an emphasis of the moral code 
of earlier times. Instead of oppression being the cause of 
exploitation, it is usually responsible for its decline. To 
preserve a subject class, the conditions to which they are 
accustomed must be continued; for with the destruc- 
tion of these morality declines, and the class disappears 
through dissipation and vice. The most complete and 
longest-enduring scheme of exploitation would be that 
relying wholly on tradition for its perpetuation, as op- 
pression and political changes of any sort hasten the 
end of the condition they are designed to further. If 
tradition does not cause men to continue their earlier 
mental attitudes, nothing else will. 

The purely egoistic forces have many ways in which 
to operate, slowly forming a new equilibrium in harmony 
with new conditions. One manifestation in modern 
times is a steady lowering of the birth-rate. Egoistic 
forces in full sway bring population to a stationary state, 
and then the need of laborers increases the incomes of 
the laboring class until the exploitation ends. The 
rapid rate of increase of population in early times was 
due partly to the high death-rate, for if families had not 
been large, population would not have been kept up. 
Every betterment of economic conditions demands a 
lower birth-rate to restore an equilibrium, and in time 
this would be brought about by physiological changes 
making the race less fertile. But egoism can effect the 
change much more rapidly by changing the mental 



1/2 The Theory of Prosperity 

attitude of men toward marriage and the care of chil- 
dren. A loosening of the marriage tie and a consequent 
reducing of the birth-rate mean that there are fewer 
individuals to arrive at maturity; so that immorality- 
can check the increase of population, even if there were 
no physiological tendencies striving to create a new 
equilibrium. 

Egoistic forces are aided by dissipation in many forms, 
industrial changes creating new forms of pleasure that 
are not restrained by the older moral code because they 
were unknown or slightly important when it came into 
being. Also in new situations it is easy to break loose 
from the old restraints; and the mixing of population 
brings every one in contact with forms of vice not known 
in his own locality. The lowest classes thus lose their 
morality, and are subjected wholly to the pressure of 
egoistic motives, which may have some effect in keep- 
ing them out of the worst forms of vice, but will not 
become effective until the earlier code is subjected to a 
severe strain, and put more in harmony with the new 
conditions. Egoistic forces are stronger than those due 
to primitive habits and customs, and must in the end 
destroy the mental attitude necessary to make exploita- 
tion possible, although they are not the sole cause of 
its decline. 

As we have seen, the interests of the dominant classes 
are promoted by exploitation only when the productive 
power of society is small, for they then in order to 
maintain their standard of Hfe need to have their own 
income supplemented from other sources. The only 
unearned fund available comes from exploitation, and 
it must continue until other sources of surplus are 



Income as Fixed by Struggle 173 

available ; but as land increases in value, it is profit- 
able to improve the conditions of the laborer so as to 
increase the rent derived from it. The higher the price 
of food the more important is the rent, and the less 
important is the fund secured by depressing the con- 
dition of the laborers. When the workman is given a 
greater part of the product, he is induced to work more 
energetically, and thus increase the amount of rent 
more than the amount of the exploitation fund is de- 
creased. The landlord thus ceases to be an exploiter 
in order to become a greater consumer of the social sur- 
plus. With progress, therefore, he consents to changes 
in the laborer's conditions ; serfs displace slaves, and 
finally free laborers are put on the land with the con- 
sent of the owner. When the rent of land becomes 
more than its whole productivity under earlier condi- 
tions, the landlord's interest in free labor is as great as 
that of workmen; for a rising price of food and raw 
material brings the interests of landlords into harmony 
with those of society. 

This interest in free labor increases as soon as pro- 
ductive capital comes into use ; for it is more perishable 
than land, and to preserve it a higher class of labor must 
be used. Land is not capable of increase, while capital 
is ; as a result the laboring class must also increase to 
keep it in use, thus making capitalists interested in the 
amount of population and the productive powers of 
laborers to an extent that landlords never are. As soon 
as capitalists become a dominant element in society they 
do away with many primitive regulations that depress 
the condition of the workman, and with this change many 
of the cruder forms of exploitation disappear. With the 



1/4 I^J^^ Theory of Prosperity 

introduction of machinery the capitalist's interest in 
free labor is further augmented ; mechanical laborers 
are displaced, and as they disappear the standard of 
the laboring classes rises in an inverse ratio. Em- 
ployers discover that a high class of laborers is more 
productive in proportion to their wages than are those 
of the lowest classes, and they also discover that tem- 
perate habits and regular ways of living exert an influ- 
ence on productivity. 

The interests of the two classes are thus brought suf- 
ficiently into harmony to make employers willing to 
give to each class of laborers their full product. If this 
result has not yet been worked out in the United 
States, it is not because the capitalist gains less by 
the increase of productivity than he loses by the extra 
wages needed to call it forth. The delay in the recog- 
nition of this principle is due partly to the holding 
over of ideas that originated in earlier epochs, and 
partly to the immigration of workmen from regions where 
the older regime has not yet been wholly displaced. 
Employers are incHned to exploit laborers far more than 
their interests demand, while the latter still suffer from 
competition with workmen coming from regions with 
lower standards. However, these facts, bad as they 
often are, do not represent permanent tendencies, for 
the pressure of self-interest on both classes will remedy 
these evils, and create an equilibrium making the labor- 
ers free and giving to them their full productivity. 

The reconstruction of old customs and habits is ex- 
tremely difficult, but a society that is not capable of the 
task must decay, for history shows that nations disinte- 
grate as soon as the egoistic interests of men become 



Income as Fixed by Struggle 175 

predominant. If history also shows that exploitation is 
present in all nations, it is not because exploitation is a 
permanent feature of civilization, but because there 
have been a series of nations of which each has gone 
through certain preliminary stages of progress and 
then fallen into decay, to be displaced by new races 
that met the same difficulties and in turn failed to solve 
them. To say that exploitation is a necessary stage in 
social progress is different from saying that it is an en- 
during part of national life. It may be impossible for a 
capitaHstic economy, such as that we are now entering, 
to overcome the difficulties that beset it ; but if it does 
succeed, it must eradicate all forms of oppression. In 
time, economic freedom is sure to assert itself, and with 
it will come a new group of restraints that will keep 
men in touch with their economic conditions without 
depressing their individuality. 

An unfavorable environment keeps men in close Social 
touch with it. Those who lack the physical qualities integration, 
demanded by their situation, as well as those who are 
dissatisfied with their condition, their food, and other 
goods, are ruthlessly swept away, and their places are 
filled by those contented with their present lot. A state 
of nature puts a ban on pessimism by quickly displacing 
the discontented or despondent, those who violate social 
traditions failing through their lack of conformity to 
natural conditions. In itself a rule of conduct has no 
force; the real force lies in the elimination of those 
who violate it. Primitive morality is a danger signal 
which no one can neglect without feeling the effect 
of the eliminating process, and it is a social necessity 
so long as these conditions continue. So long as this 



1/6 The Theoiy of Prosperity 

force operates naturally, there is social integration ; 
men grow into a common likeness when a harsh nature 
cuts off all that differ from the one necessary standard. 

If a race migrates into a better region, or its social 
condition is improved by an advance in civilization, its 
moraHty and traditions remain, but the elimination 
back of them ceases to act. New types now find 
means of persisting, thus destroying the soHdarity of 
earlier times by repeated differentiations from the old 
type. This lack of harmony ends social discipline, 
because the only support of the old morality falls 
away when the process of elimination ceases to enforce 
it. An arbitrary elimination affecting the individuals of 
all classes alike cuts off no class or type, and many vari- 
ations have an equal chance of perpetuation. The elim- 
ination making for social progress must displace whole 
classes, thus forcing society to move in a particular 
direction. Class after class of the unfit is then cut 
off, and the surviving portion to an increasing degree 
acquires the same qualities and habits. To enforce so- 
cial customs and traditions, a natural eUmination is nec- 
essary, and without it morahty soon becomes a dead 
letter. The only social safeguards are natural standards 
and a natural elimination enforcing them. Whatever 
destroys a close contact with nature makes elimination 
arbitrary, and hastens social disintegration. 

Men may be said to be naturally exploited when the 
conditions of existence are so harsh that no one with 
less than the maximum income can survive. They are 
socially exploited when an increased income is prevented 
by class or race struggles. The naturally exploited will 
be frugal and contented, for they have a natural elimi- 



Income as Fixed by Struggle 177 

nation in operation, cutting off all the dissatisfied and 
abnormal. But the socially exploited have no elimina- 
tion of the discontented or of those out of harmony with 
the dominant type, because conditions external to them 
instead of their own qualities determine survival. It is 
then that the dissatisfied, the pessimistic, the abnormal, 
and the vicious have opportunities equal to others and 
by tainting society with their peculiar views disrupt it. 

If an income of fifty cents a day is the maximum, all 
who are dissatisfied with this amount perish. But if 
the natural rate of wages is eighty cents, while the real 
rate remains at fifty cents, it is not natural conditions, 
but the notions of a dominant class that decide who 
shall be eliminated; and the conditions of elimination 
thus being arbitrary, the dissatisfied and vicious remain 
to disrupt social bonds. If, however, the rate of wages 
rises to its maximum, a natural elimination once more 
promotes social integration. Those who are dissatisfied 
with eighty cents a day are eliminated in the same way 
that those demanding more than fifty cents a day were 
displaced in the earlier society, while those who get 
the eighty cents and use it badly are cut off by dissipa- 
tion. There is now a single mode of life that fully 
meets the conditions, and those who do not adopt it 
perish through a natural process. A new social dis- 
cipline will spring up, and those who accept it have an 
advantage of which they cannot be deprived. 

No matter how high the natural rate of wages, these 
forces make ehmination definite. If wants increase 
more rapidly than productive power, the man with two 
dollars a day is farther from a complete satisfaction of 
his wants than is he with only a dollar, the pressure 



1/8 The Theory of Prosperity 

from the insufficiency of income growing with each in- 
crease of the standard. This pressure makes the con- 
tact between men and their environment closer, and 
puts at a disadvantage those who cannot secure the 
completer adjustment. The inefficient and less active 
are eliminated, and society is integrated by the fact that 
the survivors have to a greater degree the same faculties 
and impulses. Each elevation of social standards, aug- 
menting the pressure of the insufficiency of income, 
makes the surviving type more definite in its character- 
istics, and puts those lacking these common qualities at 
a greater disadvantage. A natural rate of wages and a 
definite elimination decreasing the differences in men 
have common causes. Any standard lower than the 
natural makes survival depend, not upon superiority, 
but upon the fancies of some superior class, the gen- 
eral adjustment of laborers to nature counting for little 
if men, not nature, decide who shall get employment. 
Qualities not affecting survival have no force back of 
them by which they are perpetuated and made universal. 
An arbitrary selection based upon conditions objective 
to the class among which it is going on can be pre- 
vented only by a rise of wages to the natural rate. The 
relation of each worker to nature is again restored, and 
a definite elimination once more tends to unify society. 

A single integrated type of men in a given environ- 
ment have individually the same relations to the environ- 
ment as if there were but one man in it. Each one has 
in him all the qualities needed for the adjustment of the 
race to it and is in the same position that the isolated 
freeman was in primitive times. All are adjusted to 
nature; for each increase in the pressure of wants 



hicotne as Fixed by Struggle 179 

makes elimination more definite while through it the 
moral code becomes more forceful and throws about 
them additional safeguards. There is no substitute for 
the educational effects of a direct contact with nature, 
and it alone can bring out industrial quahties and cut 
off those who do not possess them. In advanced soci- 
eties, the form of contact with nature is modified, but its 
essence is not altered. 



CHAPTER II 

Income as Increased by Adjustment 

Mental ADAPTATION is effected either by changes in the physi- 

a aptation. ^^^ man, in the relations of men to nature, or in the rules 
of action that become embodied in morality and tradi- 
tion. It is connected primarily with nutrition, which leads 
to a growth of function and of the power of assimilation. 
While the least adapted, hampered by under-nutrition, 
are killed off by starvation or disease, over-nutrition is 
equally deadly to those whose productive power permits 
indulgence in ways that weaken the physical man. For 
those who avoid these extremes there is a growing 
economy of assimilation and an increase of function 
which give to the survivor greater activity and an ever 
increasing adjustment to his environment. The round 
of production and consumption thus becomes less waste- 
ful and the social surplus is better conserved. 

These changes, however, are merely one phase of 
adaptation. Along with them go others of a psychic 
nature by which states of pain are transformed into 
states of pleasure. Pain is the record of a failure in 
adjustment and reveals some obstacle in the way of suc- 
cess. In a life where every step is a struggle against all 
manner of difficulties, against disease, against one's own 
kind, and against other species, the law of nature pro- 
vides a tragic end for every animal. It must develop 
energy enough to remove obstacles or to circumvent 

i8o 



Income as Increased by Adjitstment i8i 

them. The earhest and simplest road to success was 
through the passions which sprang up when obstacles 
in the environment could be removed or destroyed by a 
direct attack. But when obstacles cannot be overcome 
by direct opposition, desire appears and develops mental 
traits in favor of indirect methods of approach. It be- 
gins with some weak manifestation, and gradually grows 
until its strength compels action. Then it disappears 
through satiety only to reappear and to increase until it 
is again dominant. This constant recurrence of ante- 
cedent conditions develops memory, imagination, and 
reasoning. Memory, calling up the results of past expe- 
rience, permits the adoption of methods that involve the 
least danger, and thus develops caution and prudence. 
When action becomes imperative, some plan of indirect 
attack has been devised that increases the probability of 
success. 

Desire, however, is not a final stage because it does 
not indicate complete adjustment. The presence of 
obstacles to be overcome indicates a lack of adjustment 
between the individual and his environment. There is 
also in desire some element of pain, so that in spite of 
the intensity of its pleasures, desire goes with passion 
and pain.i The greater and more persistent the obstacle, 
the stronger must be the desire before means for its 
satisfaction can be successfully carried through. 

Where the relations of men to the environment are 
constant and no opposition to the attainment of ends 
exists, unimpeded activity becomes possible. There 
is a direct association between each end and the activity 
by which it is reached. The impulse to do receives no 

^Ward, "The Psychic Factors of Civilization," page 50. 



l82 



The Theory of Prosperity 



check, nor do obstacles force the use of intermediate 
steps. This is the final stage of adjustment in which 
no opposition or element of pain disturbs states of un- 
alloyed pleasure. Impulses are the motives that prompt 
this complete adjustment. 

In the diagram the relative importance of these 
stages is indicated by lines drawn from left to right. 
Pain, dominant in the first stage, gradually decreases in 
amount until in the final stage it is but little more than 
a potential force. Passion becomes prominent in the 
second and desire in the third, only in turn to be 



i II 

Way Blocked Direct Opposition 



ill ^ l^/« , . ^ 

Indirect ^°"?^^Nilwi^^'°"® No Opposition 
Opposition 



to Nature, 

NO RACE OR CLASS OPPOSITION 




dwarfed in importance by newer forces that indicate 
more complete adjustment. While passions might be 
lost and pains might become merely nominal, desire 
cannot disappear in an environment like our own where 
so many irregularities prevent complete adjustment. 
Impulses demand constant relations, and can displace 
desires only in a perfect environment. In the transi- 
tion from pain to passion the more active get an 
advantage that displaces opponents and opposition, 
for sluggishness in contest means elimination. In the 
transition from passion to desire a love for the rational 



Income as Increased by Adjustment 183 

gets the first place, while in the change from desire to 
impulse, the ideal becomes the great moving power. 

Activity is the bHnd outlet of surplus energy, with no 
other end than the pleasure its exit gives. The rational 
and the ideal, though they reach it in different ways, 
have the same goal — perfection. In cases of partial 
adjustment the normal is the perfect in terms of desire. 
It is the regular constant act contrasted with irregular 
exceptional acts that special conditions necessitate. 
The normal is thus the present environment in its sim- 
plest form. It can, however, never free itself from the 
conditions of partial adjustment. Where men reason 
there is pain and non-adjustment in the background. 
Impulse, however, moves directly away from pain, giv- 
ing the perfect with no pain associations, and creating 
the complete adjustment that has no costs nor fears. 
Surplus energy stimulates impulse, and between it and 
its object there is no bar, obstacle, nor check. 

The normal, from another standpoint, is the useful, 
that which to the greatest degree avoids pain and pre- 
vents elimination. The desire for useful objects causes 
energy to go out, not in pleasurable directions but in 
those that give a return of useful goods, and thus creates 
a diversion and reduction of energy. Where the desires 
are strong, the output of energy in creating the useful 
has been forced to take unnatural directions. The 
force of desire is thus the measure of the deviation of 
energy from its most pleasurable channel, and the 
satisfaction of desire is the reward for this deviation 
and loss. This loss is prevented or reduced in 
amount by mechanical action ; for every motor reaction, 
association of ideas, habit, custom, or other economy of 



184 The Theory of Prosperity 

mind and matter reduce costs by making the useful act 
more nearly a pleasurable action. Economy, inventive 
reasoning, and other devices have as their end the 
satisfaction of desire without pain. The useful thus 
becomes the pleasurable by every increase of routine. 

The pleasurable, however, is not primarily the object 
that satisfies desire, but the activity that affords an out- 
let for surplus energy. With increasing energy there 
is a demand for more avenues of exit. The impulse to 
do is therefore toward varied action instead of toward 
concentrated useful action. The pleasurable seems to 
be the useless and often is so in restricted environments ; 
but that which is useless — a mere expenditure of 
energy — may become the useful by a change of situa- 
tion. The impulse toward the pleasurable induces men 
to change environments — to seek the place where the 
pleasurable is the useful. The desire for goods, on the 
other hand, forces men to become mechanical and eco- 
nomical, that is, to put themselves in a situation where 
the useful becomes the pleasurable through the decrease 
of costs and the increase of satisfactions. 

Each of these roads leads to perfection though in a 
different way. The normal is the goal of desire ; the 
ideal is that of impulse. Desire demands changes in 
men by which the useful may become the pleasurable. 
It creates habits, routine, and mechanisms, and thus in- 
creases the adaptation of men to particular environ- 
ments. Impulse alters the environment so that the 
pleasurable becomes the useful, and thus develops 
nervous centres, motor reactions and new avenues along 
which surplus energy may expend itself. There is 
always a new norm back of each desire, and a new 



Income as Increased by Adjustment 185 

ideal in each increased breadth of the expenditure 
of energy. In either case there is mental adapta- 
tion, and men in thought and activity approach more 
nearly the goal that perfection demands. The nor- 
mal and the ideal become one in the final stage of 
progress. 

In the foregoing analysis the meaning and place of impulse. 
pain, passion, and desire are readily seen. The use of 
impulse is not, however, so clear, for it has been used 
in a way that suggests a variety of meanings among 
which a common thought is apparently absent. It has 
been spoken of as a movement away from pain, as a 
flow of surplus energy, as a pressure creating adjust- 
ment, as a social force, and as a pressure to make ends 
instead of satisfactions the motive for living. The 
confusion, however, is more apparent than real, and 
with a little care the thread of the argument can be fol- 
lowed. The changes that seem inconsistent are really 
changes not in the use of the word, but in the conditions 
under which the surplus energy of men goes out. 

In the round of consumption and activity goods are 
transformed into utility, utility into energy, and energy 
is expended in production, replacing the lost goods and 
starting a new round of consumption. Impulse is the 
psychic feeling accompanying the outgo of energy. 
Desire is the feeling accompanying the consumption of 
goods. From each of these sources come pleasures, mo- 
tives, instincts, and habits, and from them in turn are de- 
rived premises upon which trains of reasoning are based. 
The reasoning based on desire has been worked out in 
the prevalent utilitarian philosophy, but no correspond- 
ing study has been made of impulse. There is, it is 



1 86 The Theory of Prosperity 

true, a philosophy that naturally would seek this basis, 
but its advocates have insisted on the intuitional char- 
acter of its ideals and premises, and thus have divorced it 
from the biologic and economic basis upon which utili- 
tarianism rests. 

Because of the evolutionary process men have acquired 
certain normal wants and activities. Particular goods 
are demanded, and the activities go out in fixed organic 
grooves to supply them. The normal man in a given 
situation tends to do the acts that create the goods he 
needs. If his energy is just enough to supply these 
wants, he remains static; but the evolutionary process 
being still at work, creates greater economies in struc- 
ture, and adds to the knowledge and skill of men. The 
goods made under the new conditions are more than 
sufficient to restore the energy needed to produce them, 
thus making a surplus of energy the necessary result of 
progress. The normal man already has energy enough 
to keep active the developed powers of mind and body 
on which his normality and survival depend. This 
energy goes out in fixed channels and creates goods sup- 
plying the developed wants of men. The new energy, 
not being demanded by the conditions of present ad- 
justment, is free to go out in new lines, to develop new 
activities, and to supply new wants. The exit of this 
surplus is forced into particular directions, because the 
past development of men has already supplied the 
energy needed in other directions. 

Children furnish examples of how surplus energy 
finds an exit. Sport is merely a pleasant outlet for sur- 
plus energy. Subjectively all m.ethods of exit are alike, 
but nature or society puts more obstacles to one method 



Income as Increased by Adjustment 187 

of exit than to others, and thus forces sports to adjust 
themselves to the local conditions of time and place. 
Each season and each locality has its ways in which 
children satisfy their love for activity, and thus a regu- 
larity of action is attained which the mere exit of sur- 
plus energy would not of itself give. 

The sports of children end merely in activity because 
the evolutionary process does not work on them. They 
survive through their parents, not through themselves. 
The surplus energy of men, however, has effects on 
survival because it develops faculties, thus giving a 
greater freedom of action than they would otherwise 
have. This freedom is primarily detrimental because it 
decreases the definite relations between men and the 
immediate environment upon which welfare depends. 
There is always some best way of acting when in con- 
tact with nature, and those who do not follow it have 
a penalty to pay. To get freedom of action demands a 
break with the environment and hence a loss of adjust- 
ment. Freedom is, therefore, primarily disrupting 
and creates distinct losses. In spite of this fact, 
however, it is advantageous because it forces men into 
new environments. Breaks with present conditions are 
bad from the standpoint of adjustment, but nations gain 
by them if there is a series of increasingly better envi- 
ronments into which men move when their present 
relations are disturbed. If a normal equilibrium is once 
created, the free energy of men ceases to go out as 
mere sport, but has its direction shaped by the nature of 
the external conditions to which adjustment is going on. 
Surplus energy thus becomes a definite force breaking 
with present conditions and pushing men along the 



1 88 The Theory of Prosperity 

line of least resistance through a series of improving 
situations. 

The normal of each epoch becomes the starting-point 
of new adaptations that produce a man normal to a new- 
situation and with even more free energy. Aside from 
normal tendencies, men need only surplus energy to 
force them through every improving situation that 
nature permits them to occupy. Surplus energy thus 
moves men toward the ideal which will in the end be 
reached if no insuperable obstacle is in the way. 
Impulse naturally indefinite is given a fixed direction by 
the presence of these ever improving environments. 
It thus becomes associated with ends, and its strength 
is the measure of the distance men have gone from the 
normal of past adjustment toward the ideal of the 
future. The stronger the impulse, the more frequent 
are the breaks with the past and the more readily do 
men sHp into new and more advantageous situations. 
Impulse is primarily away from the grind and routine 
of the past, but this routine once broken is made over 
into harmony with the new environment. There is thus 
an increase of adaptation and a growth of the social 
surplus giving more surplus energy and a greater power 
to break with present conditions. 

When in these ways a better environment is entered, 
the old harmony between the desires and the environ- 
ment is disturbed. The desires normally strong enough 
to induce men to surmount the obstacles to success, are 
too strong in the better environment. Men now have 
more energy or fewer obstacles, and in either case a 
more complete satisfaction of the inherited desires is 
possible. This leads to the over-nutrition of certain 



Income as Increased by Adjustment 189 

parts, a waste of energy and a loss of physical vigor. 
The man normal to the new situation must have these 
desires reduced. To those who indulge, they become an 
evil leading to elimination. 

Over-nutrition and the consequent indulgence lower 
the estimate of the self and the reaction against them 
leads to self-denunciation. The whole self or some 
part of it is looked upon as depraved. If the antipathy 
to self assumes a religious form, the doctrine of total 
depravity appears ; if it assumes a moral form, the 
passions are denounced as vicious. In either case self- 
restraint becomes a dominant motive, and the self is 
pictured as lacking some of the qualities that belong to 
the normal man. There arises in this way a breach 
between the individual and the type through which it is 
freed from imperfections. The type is associated with 
the group to which a man belongs, thus raising it above 
the individual. Each person makes the model of his 
group a man like himself, but without his weaknesses 
and shortcomings. He thus creates a social standard 
above that of individual men. 

There comes thus into existence a third category. 
Between the hke and the unlike, the good and the bad, 
is the partly-different. It has the good qualities of the 
like but is without the imperfections of individuals, and 
becoming idealized is associated with the group to 
which a man belongs. This tendency causes men to 
have confidence in the group of which they are a part, 
and in their leaders, who when idealized, seem free from 
human imperfections. All recognized shortcomings are 
imputed to individuals, the type being raised higher by 
each contrast between personal weakness and group 



1 90 The Theory of Prosperity 

integrity, A Christian must think of a Christian as 
better than himself before his reUgion becomes a social 
force. He then refuses to impute to the church the 
weaknesses and motives that he finds in himself or in 
other individuals. In politics, also, a man thinks of his 
party and its leaders as better than himself. 

This idealization of the partly-different takes place in 
every field of social activity. Each instance of personal 
indulgence or weakness leads to the elevation of some 
type that becomes the norm of activity. The desire to 
associate with the better-than-self helps the individual 
to repress his passions and shortcomings. The contrast 
with the partly-different thus tends to elevate him and 
put him on a level with the ideal. The hero, the gen- 
eral, the king, the noble, the gentleman, the Virgin, the 
Madonna, the Christ, all have in them human elements, 
but each is without the imperfections found in indi- 
viduals. Ideals raise the norm and depress the self. 
The bolder and more vivid they are, the more depraved 
the individual appears, and the stronger the motives for 
personal improvement. Self-restraint elevates the race 
and creates a confidence in its integrity and purity. It 
is a higher personality because it is the person minus 
his shortcomings. Men thus become absorbed in 
national life and in its various institutions. Each 
group is better than the individuals that compose it, 
and furnishes standards by which they are judged. A 
nation is thus not a democracy of equal individuals. 
The belief in a better-than-self is the binding ele- 
ment on whose ascendency the continuance of each 
social group and institution depends. Above each 
individual is the partly-different, the better-than-self; 



Income as Increased by Adjustment 191 

below him is the different — the worse-than-self . Social 
conflicts are with the latter, while individual conflicts 
are with the elements in the self differing from the 
former. The feeling of depravity is a stepping-stone 
to society, the belief in total depravity being an over- 
emphasis of a quality needed by all social beings. Only 
the groups who feel it can participate freely in the 
higher forms of institutional life. Self-repression is 
group exaltation ; it makes clubs, unions, clans, parties, 
and churches, and these in turn pave the way for the 
feeling of nationality. A simple impulse thus produces 
great effects. Men with a large social surplus cannot 
remain normal except through changes that impute to 
the social type a higher personality than that found in 
the self. Society is the better-than-self. 

Impulse thus assumes three forms. Primarily it is a 
movement away from pain, but as a manifestation of 
surplus energy it is converted into a movement away 
from the local environment, the break with present con- 
ditions being more than compensated for by the better 
environment into which men move. This improvement 
disturbs the psychic as well as the physical adjustment, 
and makes some of the inherited desires too strong for 
present needs. These desires being a part of the self, 
a movement away from the self is made necessary by 
the change of environment. An indefinite impulse 
away from pain is thus transformed into a more definite 
impulse away from the environment, and finally into a 
very definite impulse away from the self. Surplus 
energy makes changes in all these fields, and forces 
men in the direction of the ideal in which there is no 
pain, no opposition, and no defect. 



192 The Theory of Prosperity 

Idealism. Ideals are places and concepts better than the real 

toward which the impulses of men drive them ; impulses 
are surplus energy flowing out in a channel fixed by 
environing conditions. Surplus energy thus stimulates 
definite impulses that move men toward the goal of 
complete adjustment. When a man is completely iso- 
lated, the waste due to expenditure of energy just equals 
the nutrition obtained through the consumption of goods. 
An outlay of energy in excess of nutrition reduces the 
physical vigor ; an excess of nutrition over energy causes 
degeneration and dissipation. When there is more 
nutrition than waste, an organism is anabolic ; while 
in the opposite condition of more waste than nutrition, 
it is katabolic.^ It cannot, therefore, be anabolic or 
katabolic except as it has a complement with the oppo- 
site tendency, as happens in sex relations. Males are 
katabolic, the energy expended tending to exceed the 
nutrition, while females are anabohc in that they tend 
to store up energy which subsequently is used in repro- 
duction. Sex differentiation thus allows the males to be 
more energetic and the females to provide more fully 
for the young than if each individual maintained a strict 
equilibrium between waste and nutrition. 

This tendency to perpetuate a katabolic predomi- 
nance is manifest wherever complementary relations 
exist. Increased adjustment gives men surplus energy, 
and makes them katabolic. This would be injurious 
unless some complement existed that becomes anabolic 
as men become katabolic. Men and the environment, 
or men and society in its broadest sense, are com- 
plementary in this way. For individual men, society 

^ See Geddes's and Thomson's " Evolution of Sex." 



Income as Increased by Adjustment 193 

comprises the totality of those external environmental 
factors adapted to their wants and needs. Their sur- 
plus energy can increase the waste from action more 
rapidly than nutrition for its repair, if social relations 
are steadily improving so that more is stored up to aid 
men in the future. The growth of capital, the cultiva- 
tion of land, the erection of buildings, the increase of 
machinery, the making of roads, the construction of 
railways, the beautifying of cities, and other improve- 
ments make society anabolic, and thus allow men to 
become more katabolic. In an improving society each 
round of production and consumption leaves a slight sur- 
plus which, becoming energy in men, makes them more 
active ; and in the outgo of energy the environment is 
improved so that more can be stored up for the subse- 
quent use of men. The surplus is thus enlarged, more 
energy is generated, men increase in activity, and 
society stores up still more for subsequent use. 

There is, therefore, a constant pressure to make men 
katabolic as society becomes anabolic. Since society in 
its most concrete forms is a group of places, it can be 
said that places become anaboHc to the degree that the 
pressure of surplus energy makes men active. The 
kataboHc man is the best man, and the anabolic place 
is the best place. Men, through evolution, therefore, 
lose anabohc tendencies, and places acquire them. 
These facts shape the ideals of men. Personal ideals 
are a union of katabolic tendencies; place ideals are 
increasingly anabolic. Men eject from their ideal 
of themselves anything that is not expressive of their 
energy. The hero is a doer, not a consumer. On 
the other hand, places are idealized for their stability. 



194 1^^^^ Theory of Prosperity 

permanence, richness, and beauty. They yield satis- 
factions, and restore the waste wrought in men by the 
intensity of their activity. Surplus energy is thus the 
source of the process of idealization, impelling men to 
be more active, and causing them to set up as an ideal 
a man more katabolic than themselves. To get a new 
equilibrium, places must be idealized in order that 
they may appear more anabolic than they are. Each 
increase of energy emphasizes this tendency. Men 
have always before them a more kataboHc concept of 
personality and a more anabolic concept of places than 
they have attained or known. 

IdeaHsm is the isolation of anabolic and katabolic 
concepts wrought out by the pressure of surplus energy. 
Once started, the process cannot stop until energy is 
idealized as God, and society is considered the mother 
of all. These two, when isolated, represent the sum of 
katabolic and anabolic tendencies. The same contrast 
yields religion as opposed to science, and the man or 
individual as opposed to organized society. An ideal 
is not useful and hence cannot become normal unless 
its complement is developed to an equal degree. Defi- 
nite ends are placed before men by the isolation of the 
anabolic from the katabolic. The initial tendency away 
from self is transformed into an endeavor to become 
katabolic, while the tendency to break with place and 
environment becomes a force that makes them more 
anabolic. Impulse in this way gets a definite goal as 
fixed as are the objects of desire. It is heredity ex- 
pressed in activity. 
Selection. The process of elimination has no goal or end, but is 

simply away from pain. If the elimination is at definite 



Income as Increased by Adjustment 195 

points social integration results, a clearly defined type 
appears, the energy is increased and a normal standard 
is formed by which individuals can be judged. Were 
it not for the increase of energy, the type and the 
standard would tend to remain static. As elimination 
cuts down pain, there is set free among the survivors a 
like amount of energy that can be used in new ventures. 
The normal activity is thus disturbed and a new equi- 
librium is worked out to meet the situation. Normal 
progress depends on the direction in which surplus 
energy goes, and if there is a law determining its out- 
put, the movement away from pain due to elimination 
assumes a definite direction and gives to progress a 
well-defined goal. 

Activity is prompted either by desires or impulses. 
Desires grow until enough activity is generated to over- 
come the obstacles, and the pains of the process are 
offset by the pleasures of acquisition and satisfaction. 
On the mental side they force a concentration of 
pleasures and activities ; and on the physical side 
they promote mechanical action and the economy of 
structure through which the pains of concentrated 
activity may be reduced. This concentration of wants 
and activities, forced upon men by the obstacles of a 
partial adjustment, reduces the pleasure both of con- 
sumption and activity. It is a well-known law that the 
increased consumption of commodities gives decreasing 
pleasure. Concentrated activity, likewise, is decreas- 
ingly pleasurable ; it soon becomes mere work, and thus 
is transformed into pain. Desires consequently tend to 
decrease pleasure by forcing a concentration of wants 
and activities ; and they would be an evil if their growth 



196 The Theory of Prosperity 

were not due to an elimination that for the survivors 
reduces pain and frees surplus energy. But the loss 
through concentration is more than offset, because the 
units of commodity, while giving less pleasure, are 
increasing in number. 

Physical adaptation ends in an economy of structure 
and a concentration of wants and activities. The habit- 
ual acts of men draw off considerable energy, and are 
the first tax on it, all energy less than the ordinary 
amount being directed to these conventional channels. 
Surplus energy, however, seeks new channels, creating 
new motor reactions and new wants of increased 
urgency. Increasing vitality goes out in new Hnes 
and creates new powers and satisfactions, while decreas- 
ing vitality dwarfs the new powers and concentrates 
energy in the older channels of exit that have become 
the lines of least resistance. Here the law of decreas- 
ing utility acts, because additional units of commodity 
supply wants that are already partly satisfied. The 
wants created by surplus energy have no such limit. 
Each addition to the fund of energy going out in 
new channels encourages new activities and supplies 
new wants. There is thus a natural pressure to do new 
things and to consume new articles. Only the presence 
of obstacles and pains forces a concentration of wants 
and activities. The newer powers then suffer more 
than the older habitual activities, and thus cause a 
reversion to earher types. The normal man moves 
away from primitive men because he is adjusting him- 
self to new and better conditions, and is made normal 
by these tendencies. He adds to his vitality through his 
better adjustment, and thus is able to expand his wants 



Income as Increased by Adjustment 197 

and activities, through which a still better adjustment 
is attained. There is thus a differentiation going on 
between those of decreasing and increasing vitality. 
More vitality develops normality ; less vitality impels 
toward abnormality. The newer powers suffer from 
a decrease of surplus energy. Wants and activities 
are thus concentrated, and survival is possible only 
by moving into a simpler environment, where the 
older and more habitual forms of activity command 
success. Vitality forces a choice of environments har- 
monizing with its amount. It may also lead to an 
increase of anabohc habits, with degeneration, rever- 
sion, and depravity as consequences. All these are 
involved in retrogression, and are different names for 
the same process. A concentration of wants takes 
place only in an unfavorable environment, with an 
increasing number of obstacles to surmount. Deprav- 
ity is excessive attention to these absorbing wants, 
and an aversion to it must be a part of all tendencies 
that expand wants and activities. Growing desires also 
cause a greater absorption of nutriment and a weaken- 
ing of the motives to activity. If these anabolic ten- 
dencies continue, the organism becomes sluggish and 
sinks back into some simpler environment, where less 
activity is demanded; if reversion is not possible, it 
becomes a parasite, getting its nutriment from an active 
host and thus reducing the need of activity. Anabolic 
variations among men are the cause of the social parasit- 
ism, since improving conditions allow those with con- 
centrated wants to become dependent and lose their 
vigor. Selection must therefore favor the growth of 
katabolic habits. In each new equilibrium man is more 



198 The Theory of Prosperity 

energetic, while nature and society to a greater degree 
become a storehouse in which the waste of activity can 
be repaired. The abnormal thus tend to become more 
abnormal through the growth of anabolic habits, while 
the normal increase their normaUty through the growth 
of energy and a closer adjustment to nature. 

There is thus a progress by the concentration of 
wants and activities which, forcing men deficient in 
vitality into simpler situations, leaves those with more 
vitaHty better opportunities to develop. There is also 
by the expansion of wants and activities a progress in 
which there is no elimination of individuals. Men with 
increasing vitality escape competition because the press- 
ure of their wants and activities forces them into new 
situations. In this case there is a natural selection of 
environments corresponding to the natural selection 
of individuals in the other. Men of energy constantly 
discard poorer situations, just as men without energy 
seek them or tend toward parasitism. The pressure of 
expanding wants and activities is thus an independent 
factor in progress, and is a force wherever the increase 
of energy disturbing the normal equilibrium impels men 
toward the better adjustment of a broader environment. 
Between these two lies a third form of progress, — prog- 
ress by influence. Many who would not of themselves 
break with their environment are carried along with a 
forward movement. A nation may progress steadily, 
even if but a few persons are stimulated by increasing 
energy to an expansion of wants and activities. Then 
progress by influence affects other persons and creates 
standards to which all men aspire. 

Evolution on its organic side predicates a rapid rate 



Income as Increased by Adjustment 199 

of increase and an inherent tendency to vary in all or- 
ganisms. Place these organisms in a fixed environ- 
ment and the ensuing struggle develops an economy 
of structure and the growth of useful qualities. The 
eliminating force lies in obstacles that the economy of 
structure and the concentration of desires tend to over- 
come. The acme of this economy and concentration 
is the normal which leaves out every non-essential to 
present existence. 

Since its primary impulse is toward the pleasurable, 
increasing energy does not have its direction determined 
by these laws. Its action lacks the economy of the 
normal, because it makes its exit through the non-devel- 
oped as well as through the developed parts of the 
body. In the present situation, this growth of non- 
essentials is useless. Their usefulness comes from the 
impetus they give to seek new situations where the 
pleasurable activities are also useful. Men change 
environments to get an outlet for surplus energy ; they 
change commodities, mechanisms, food, and other par- 
ticulars to get the economy that prevents elimination. 
The one is a progress toward the ideal through expan- 
sion ; the other is a movement toward the normal 
through economy and concentration. There is thus 
a progress through the selection of individuals and also 
a progress through the selection of environments. The 
one leads to the perfection of economy; the other to 
the perfection of energy. Social integration demands 
both normal standards and ideal ends so that the useful 
may become the pleasurable, and the pleasurable at the 
same time may become the useful. Where both these 
tendencies are in operation, the social surplus grows. 



200 The Theory of Prosperity 

But where there are obstacles to be overcome, the 
desires grow until the energies are sufficiently concen- 
trated to force an economy of structure by which the 
pain of the useful action is reduced. The desires are 
thus cost ehminators and attain strength enough to 
effect the economy and elimination that are their end. 
Any surplus pleasure is transformed into free energy 
which impels its possessor to expand his wants and 
activities in the direction of the ideal. 

Partial adjustment has thus its pains and its com- 
pensations in satisfaction, and it yields a surplus increas- 
ing as action becomes normal. In addition to this 
surplus, every increase of energy creates a self-perpet- 
uating surplus from which there are no deductions. 
Complete adjustment has nothing but pleasurable 
activity. Normal standards are transformed into ideals, 
and thus a goal is set that gives a definite end to 
activity. The pleasurable becomes increasingly useful, 
as these ideals are attained through environmental 
changes. Clear ideals are thus the great source of the 
surplus, since they give a direction to progress im- 
possible to secure from any economy of structure or 
elimination of the unfit. 
Social Reason is apparently the highest stage of human 

reasoning. development, and thus becomes the criterion of truth 
and right living. Viewed, however, as a part of the 
evolutionary process, it does its work more or less 
imperfectly, as do all developing faculties. In this 
light, it is one of the results of indirect activity, and 
a complement of desire growing perfect in the regions 
where desires dominate. 

When obstacles to success must be surmounted by 



Income as Increased by Adjustment 201 

indirect opposition, the initial change is a growth 
of desire to meet the situation. If certain satisfac- 
tions are delayed or prevented, particular desires must 
grow until the activities are so concentrated that 
the goods giving these satisfactions are produced. 
Were all indirect opposition met in this simple manner, 
the process of adjustment to new situations would take 
a long time. Psychic reactions are of slow growth, and 
when made are changed with even greater difficulty. 
Reasoning, however, by increasing the indirectness of 
action, reduces the necessity of strong desires and a con- 
sequent concentration of activities. In direct attack, fail- 
ure and probable ehmination result if some one activity 
is not vigorous enough to meet the situation. Indirect 
attack utihzes several activities, none of which need be so 
strong as the one made use of in direct attack. The de- 
sires that stimulate these activities are, therefore, more 
varied and individually weaker than the passion that 
aroused the one activity needed for direct attack. 
When reasoning supplements desire and points out 
still more indirect methods of approach, the number 
of useful activities is again increased and each of 
them may be weaker than if the situation were met 
solely by a growth of desire. 

So, also, when the environment is altered the old 
desires remain, creating cravings for their satisfaction. 
If a change in desires were the only method of adjust- 
ment, a painful evolutionary process would be neces- 
sary until the old desires had disappeared and others 
had been substituted for them. The man would have 
different wants, but no more of them ; he would have 
changed but not progressed. The use of tools, increase 



202 The Theory of Prosperity 

of capital, growth of commerce, and improvements in 
agriculture, however, allow old wants to be supplied in 
new situations. The number of pressing wants is thus 
increased, the concentration of wants and activities is 
less marked, and the desires are not so strong as if 
more direct methods of approach were used. Reason- 
ing furnishes a ready and easy method of adjustment 
to new situations which it would take ages to bring 
about if they were met by the slow growth of desire. 

Reasoning and desire, therefore, are due to indirect 
opposition, and their presence shows that adjustment is 
but partial. An obstacle to success is needed to arouse 
desire, and the pain of non-satisfaction stimulates reason- 
ing. The premises from which the reasoning proceeds 
are connected with the obstacle that arouses desire. 
Every situation is simplified by reasoning, until only 
the essential features of the opposition to the satisfac- 
tion of desire are apparent, and then a weaker desire or 
several lesser desires can concentrate the activities 
enough to remove the obstacle and to bring the satis- 
faction that the desires crave. Hence, the particular 
conditions of each environment determine the strength 
of desire and the clearness of reasoning. When reason- 
ing is once developed, it may be used in many fields ; 
when desires spring up in local situations, they may be 
kept alive in many other situations, but the clearness 
of reasoning is fixed by the original situation where 
its exercise is a condition of survival, and this situation 
also fixes the strength of desire. 

Indirect action, therefore, has three primary laws. 
First, desire must be strong enough to concentrate the 
activities sufficiently to overcome the obstacles to success. 



Income as Increased by Adjustment 203 

Second, the power of reasoning must be sufficient to 
eliminate errors in choosing the easiest path to over- 
come the obstacle. Desire thus creates the motive of 
approach, while reason points out the path. The third 
law is that persons with the same desires hold the same 
premises. Such persons have a common environment 
and the same obstacles to overcome. Desires, it must 
be remembered, are wants concentrated to meet local 
conditions. Premises for reasoning come from a clear 
perception of the obstacles that concentrate wants 
in these situations. Desire and reasoning, therefore, 
cannot be separated. They have the same causes, are 
due to indirect activity, and are parts of the partial 
adjustment that appears when obstacles to success must 
be overcome. 

Individuals thus come into societies with desires and 
premises that result from the evolutionary process of 
which they and their class are products. This reason- 
ing is correct enough to furnish an adequate guide to 
individual conduct; and those having common desires 
and premises can discuss with each other and unite upon 
standards that have a rational basis. For individuals, 
and for single classes, reasoning may become a guide to 
action, but it cannot arbitrate between classes. It is the 
essence of class or race differences that the members 
of each group have desires and activities peculiar to 
particular situations. Each environment creates a con- 
centration of wants to meet the special obstacles it 
forces men to surmount, and their premises harmonize 
with these desires. There can be no common premises 
to all these groups because there are no common desires, 
or, at least, the premises of each group are partly differ- 



204 1^^^^ Theory of Prosperity 

ent because their desires are not the same. As soon, 
therefore, as a united society develops among different 
classes or races, common premises disappear, leaving 
it in a position where passion and struggle must settle 
class and race conflicts. 

The concentration of wants and activities out of which 
reasoning springs is due to the obstacles of a partial 
adjustment. Opposed to this type of 'progress is that 
due to the expansion of wants and activities. The 
surplus energy goes out in new channels, and by this 
energy impulses are created that press on to a complete 
adjustment. Each new outlet of surplus energy stimu- 
lates some ideal and an activity to realize it, so that 
new ideals and impulses appear with each expansion of 
wants and activities. In a complex society with differ- 
ent classes, the surplus energy of all of them will go 
out in the same direction — the line of least resistance 
in the new environment. The new ideals and impulses 
of all classes will be the same because due to present 
conditions. But the old desires and the old premises 
will be different, for each class or race has those that 
developed in earlier situations. The rational, based 
as it is on past conditions, will, therefore, fail to give 
a solution to social problems or to furnish a basis upon 
which classes or races can unite. The new impulses 
and ideals being all that great races have in common, 
social problems must be treated from the standpoint of 
complete adjustment. To passion and conflict there is 
no check, except in the growth of common impulses and 
ideals. Social harmony hes in what the race has before 
it, and not in that through which its component ele- 
ments have individually passed. 



Income as Increased by Adjustment 205 

Let me restate this thought, starting from a more 
elementary principle. If vitality is increasing, the sur- 
plus energy seeks new outlets and brings society into 
accord by giving to its members hopes and aims in 
harmony with existing conditions. They all move in 
the direction of the pleasurable, making it the useful 
by forcing environmental changes. If, however, the 
vitality of individuals or classes is decreasing, they re- 
strict their activities and concentrate their attention on 
the part of the environment made vivid by their hered- 
ity, and reason about it until its features are transformed 
into clearly defined premises, the use of which gives 
greater economy to action. This tendency to return to 
antecedent conditions favors social disintegration, and 
so develops a hopeless philosophy. Clear, shrewd 
reasoning, egoistic action, and a pessimistic tone result 
from the depression of a losing conflict, which gives to 
the defeated no escape but through a retreat to a more 
restricted environment. A dialectical civilization or 
party is always disintegrating. Each class falls back 
on its primary instincts and traditions, and these relate 
to the local conditions under which the class originated. 
In disintegration there appear as many groups and as 
many distinct types of reasoning as there were original 
elements out of which the society sprang. Even in the 
most progressive societies, some classes and individuals 
are withdrawing from open conflict because of reduced 
vitality ; others are using their surplus energy to enter 
a larger environment. The first class emphasizes desire 
and reason ; the second develops the impulses and ideals 
which the larger situation demands. Society thus dis- 
integrates on the side of desire and integrates on that 



2o6 The Theory of Prosperity 

of impulse. Desires are the outcome of past conditions 
and local situations, and as they become prominent they 
isolate men into the elementary groups out of which 
society came. Impulses spring from the new situation 
acquired through surplus energy. They blend the 
isolating elements and give a prominence to the new 
and the general toward which society is moving. Peo- 
ple sinking in vitality hold tenaciously to old dogmas, 
while those increasing in vitality believe in doctrines 
giving scope to their growing energy. The latter 
will reject old truths because their increased vitality 
causes them to test the situations which block the way 
to new activities. This class will believe in what they 
are doing ; the other in what they have done. A pro- 
gressive group is always united, because the beliefs of 
its members come from their acts and impulses; a sta- 
tionary group falls apart through the tendency of each 
faction to emphasize a past in which other groups did 
not participate. 

In his " Social Evolution," Mr. Kidd affirms that rational 
conduct fails to create social progress, and that religion 
has been the power uniting men and causing them to 
subordinate their individual interests to general welfare. 
This doctrine harmonizes with the thought that the 
desires and the reasoning based upon them are socially 
disintegrating. Individual passions can be suppressed 
by reasoning; all their elements lie in one conscious- 
ness, and clear reasoning can subordinate the less 
essential to the more important. Social passions can- 
not be checked in this fashion. There is no one con- 
sciousness in which all feehng centres. The different 
groups do not have the same desires, because those of 



Income as Increased by Adjustment 207 

each group had their origin in particular local condi- 
tions. The premises of the groups will not match, and 
their utilitarian calculus will vary with the kind and 
intensity of their desires. Each group reasons accu- 
rately and sums up its pleasures with equal facility ; but 
premises and desires differing, no common conclusion 
can be reached. Rationalism fails in a complex society 
because there are no common premises, nor is there any 
general utilitarian calculus. The seemingly general 
principles are, after all, not universal, and when an 
attempt is made to enforce them, struggle and disrup- 
tion follow. 

The victories of rehgion are in complex societies. 
The great religions emphasize the impulses of men and 
thus unite men on the issues where progress is pos- 
sible. The standpoint of partial adjustment can do 
nothing to placate struggle and conflict between classes 
and races. Only in the ideals and impulses of com- 
plete adjustment does harmony exist. For things social 
there is either no adjustment or complete adjustment. 
In family life, for example, the desires of men and 
women are not all in common, and their environment 
cannot be the same. A man and wife can therefore 
argue endlessly on this basis, with no other result than 
the disruption of the family. For those who are partly 
different there is no rational basis of agreement. 

In politics rational principles succeed only in simple 
societies where no distinct classes exist. A common 
environment and common desires create a united race 
and a rational basis of action. But when the bounda- 
ries of the original situation are passed, and those having 
other desires are incorporated into the nation, the old 



2o8 The Theory of Prosperity 

basis of unity is gone. In America, for example, the 
descendants of the Puritans do not have the same de- 
sires, and therefore do not reason in the same fashion as 
the Irish, the German, the ItaHan, and others that have 
been admitted to citizenship. Any rational campaign 
based on the accepted principles and traditions of par- 
ticular classes tends toward social disintegration. It is 
only the newer impulses and ideals which all have in 
common that serve as a basis of unity. Men must be 
idealized until all differences disappear; the national 
environment must have its general features emphasized 
until the peculiarities of locality sink out of view ; the 
misery of cities and the hardships of country must be 
lost sight of in the fresher view of life that art and 
nature arouse. There is nothing but disruption in the 
premises of isolating desires or in the local traditions of 
the incorporated factions. 

There is in all this a single principle so important 
that it needs renewed emphasis. Reasoning is based 
on the concrete conditions that create obstacles to satis- 
faction. Being bound up with desire, it reflects the stand- 
point of partial adjustment, and fails, therefore, to unite 
classes and races when these must be blended into 
larger groups. It resembles parasitism, because it im- 
poses on those who doubt its premises the difficulty 
and danger of testing them. Only those with free 
energy dash against the obstacles they represent and 
thus discover whether or not they are parts of the real 
environment. The reasoner is less active than the 
doer, and depends upon him for present adjustment. 
When a member of a group or society, it acts while 
he protests, and thus he enjoys without effort what 



Income as Increased by Adjustment 209 

others gain. Individual progress goes from passion 
to desire and ends in the rational and normal, while 
social progress goes direct from passion to impulse and 
ends in the ideal and perfect. Every individual and 
nation must go through both kinds of progress, which 
must, however, be kept distinct. It is a bad rationalism 
that seeks to dispute with others about their desires, 
or that tries to force on them premises not given by 
their own environment nor coming from their race ex- 
periences. It is an equally bad ideaHsm that tries to 
dictate about present conditions, or to force men to 
ignore the warnings which the desires give of the exist- 
ing evils. The standpoints of a partial adjustment and 
of a complete adjustment must exist side by side and 
exert an influence on acts in their own sphere. Men 
should reason where they are alike, but where they dif- 
fer they must have impulses to move them toward 
some common goal. 



CHAPTER III 

Income as Modified by Economic Rights 

The source If economic forces alone controlled the disposition of 
o rights. income, the problem of distribution would be simple. 
As prosperity increased productive power, a rise in the 
margin of consumption would socialize the increased 
income. The absence of the power of substitution 
might at first create rent, and the force of tradition 
might hold men to old forms of activity thus leading to 
exploitation ; but the power of substitution would finally 
be restored, and the old traditions would break down or 
be replaced by others in harmony with present condi- 
tions. The gradual equalization of income cannot be 
prevented by rent nor exploitation ; they are checks, but 
not bars to progress. When a homogeneous race is in 
touch with a fixed environment, economic equality is 
sure to be attained. Prosperity, therefore, means 
social progress so long as the only forces in operation 
are economic. But when race differences enter, the 
rational basis of equality fails to preserve unity, because 
there are few common desires, and the traditions of 
each race or class are the result of its past conditions. 
The surplus energy that would have gone into new 
channels is consumed in struggle and conflict. 

There is no check to passion and conflict except 
through the growth of common impulses. Race im- 
pulses are vital, not rational, and depend upon superior 



Income as Modified by Economic Rights 211 

vitality and surplus energy. Increase the vitality and 
the surplus energy of all will go out in directions fixed 
by the present environment, so that the new impulses 
will be felt by all who participate in prosperity and thus 
share in the increased vitality it brings. These impulses 
are the only forces holding diverse races and classes in 
unity ; the smaller groups are held together by tradi- 
tion and desire. For these groups the standpoint of 
partial adjustment with its utilitarian calculus suffices, 
while the larger unity of races and classes is formed by 
a movement direct from passion and conflict to the 
equilibrium of complete adjustment. Surplus energy 
moves toward the pleasurable — the new that has no 
alloy of pain; and this is the ideal of complete 
adjustment. 

Individual progress starts with the perception of an 
obstacle to surmount; there is a pain followed by a 
desire, and a rational procedure is devised to avoid the 
pain and to satisfy the desire. The movement that 
safeguards against the pains of the environment ends in 
a moral code, and is the goal of individual progress ; but 
social progress starts from new resources creating addi- 
tional income. More vitality and surplus energy is 
created, a new impulse to activity is formed, and then, as 
the goal of action, an ideal appears which is formulated 
as a right when there is an impulse to enforce it. As 
morality is the safeguard from evil, so rights are safe- 
guards to the outlets of surplus energy, and have the 
same place in social progress that the moral code has 
in individual progress. Prosperity ends in the assertion 
of rights for the same reasons that adversity ends in a 
new formulation of moral rules. Rights and morality 



212 The Theory of Prosperity 

thus complement each other; the one protecting the 
pleasure of activity, and the other avoiding the pain 
of non-adjustment. Hence, rights stand in the same 
relation to ideal action that the moral code does to 
normal action. 

In a complex nation like the American, there is no 
rational principle uniting the various classes, sections, 
and races. Each class has its own needs, each section 
has its own peculiarities evoking particular desires, and 
each race has its own heredity. No class becomes large 
enough to dominate ; no section is so important that 
the others must yield ; nor is any race so superior that 
it can impose its heredity and tradition on the nation. 
There is, therefore, no rational source of unity. Each 
state or group of similar states has its own environment 
and develops desires that fit its situation; and the rational 
code of each region conforming to these conditions can 
have little force beyond its boundaries. But common to 
all are the new impulses that prosperity brings, and from 
them will come the forces creating national unity. 

The labor situation has dangers because neither party 
to the conflict it creates is strong enough to dominate. 
In particular industries or localities one of the parties 
may suppress the other; and if this region were a 
nation, a group of common principles might gain accept- 
ance. But no matter how large the industry or region, 
it is only a part of the Union, and its tendencies are 
counteracted by the conflicting tendencies of other 
regions. Therefore, a new tradition cannot arise, 
since the laborers are in the main controlled by the 
traditions of past exploitation while the employers are 
dominated by those of self-made men. Between the 



Income as Modified by Economic Rights 213 

pessimism of the one and the optimism of the other 
there is no basis for unity. 

In the transformation that is now going on, by which 
a new nation is being superimposed on the traditions 
of locaHty, class, and race, there is Httle hope from the 
direct play of economic forces. The social surplus may 
be secured by workmen, monopoHsts, or investors ; but 
there is no fixed division of income separating it into 
funds predetermined for the use of a special class. 
A theory of prosperity may be worked out from any 
of these viewpoints ; and if the viewpoint is consist- 
ently held, all the essentials of prosperity may be made 
clear. But the conditions of prosperity give little clew 
to the distribution of wealth. Where race and class con- 
flicts enter to disturb the natural flow of income, little 
light is thrown on distribution by a knowledge of existing 
conditions. Harmony and unity come from other causes. 

In each locality and class a group of desires in har- 
mony with the local environment must displace or 
modify the old desires upon which the existing tradition 
is based. There will then develop a new moral code, 
local in character, and yet general enough to induce 
large bodies of men to accept it. A rational procedure 
based on the desires can thus reconstruct race tradi- 
tions, and unite men into groups with a basis in the 
present environment. Beyond this, rationalism cannot 
go. But it may be supplemented by impulses due to 
the surplus energy that prosperity creates ; and these 
impulses, going out in the same direction, form ideals 
and superimpose on the local codes rights that all 
classes will accept. The local, class, and sectional 
forces making for unity are moral ; the general forces 



214 ^-^^ Theory of Prosperity 

are impulses and ideals formulated as rights. It is not, 
therefore, from a theory of distribution that a solution 
of present difficulties will come, but from a better for- 
mulation of the moral code and from a clearer perception 
of the common rights that new impulses and ideals 
evoke. Economic analysis will show the causes of 
prosperity ; but prosperity must cause surplus energy to 
go out in natural channels before useful checks to action 
and pleasurable modes of activity become apparent. 

There are many indications of progress in both these 
directions. In each section and class a new morality 
is building safeguards against local, class, and party 
evils. New rights are also gaining recognition, even 
if they have not been formulated and consciously 
accepted. We should look for these, not where strife 
and party conflict force unsolved problems on the atten- 
tion of the public, but rather upon those occasions and 
moments when great prosperity induces men and 
classes to lay aside the armor of struggle and to be 
natural because they are successful. A capitahst is 
rational and pugnacious in conflict, but generous and 
impulsive in giving. A corporation is reactionary in 
adversity, but sets better standards when success is 
assured. A party is made moral and rational by de- 
feat ; it represents the national impulse only in moments 
of victory. The ideals of laborers are not shown in a 
strike, but at times when they are organizing for mutual 
advantage. The progressive element of city life comes 
to the front, not in struggle with corruption, but in the 
many voluntary associations that men enter from a love 
of their locality. Each new organization represents 
some incipient ideal which, when clearly perceived, be- 



Income as Modified by Economic Rights 215 

comes a right that all enjoy. Economic rights are born 
of adjustment, not of struggle. Being the emotions of 
success, they are first felt by men with surplus energy 
and then imposed on society. The income such rights 
transfer comes directly from the social surplus and so 
makes no national deficit. 

The rights upon which political freedom depends 
have already been worked out. They were obtained 
by picturing a primitive society where men were so 
isolated that their relations were simple and plain. The 
problem of economic freedom is to find a modern equiva- 
lent for the rights that in earlier times went with land. 
The workman of to-day should have all that the land- 
owner of the past enjoyed. Freedom consists not 
merely of political rights, but is dependent upon the 
possession of economic rights, freely recognized and 
universally granted to each man by his fellow citizens. 
These economic rights measure freedom in proportion 
as there is a mutual agreement concerning their desira- 
bility, and as complete adjustment makes their reali- 
zation possible. Only those rights that American 
conditions permit and the impulses of unimpeded 
activity may attain can be properly considered ideal. 
I shall enumerate a few, which, at the present time, 
seem to be in harmony with the forces making for 
adjustment, and if so must be incorporated in the 
national thought and become as clearly defined as are 
political rights. The rights here enumerated will doubt- 
less be added to as time goes on and conditions of 
adjustment to American environment improve, or as 
that environment itself changes. For the present they 
may be considered under the following heads : — 



2i6 The Theory of Prosperity 



I. PUBLIC OR MARKET RIGHTS 

The right to an open market. The right to publicity. The right to 
security. The right to cooperate. 

The right to A free laborer takes full advantage of his industrial 
an open situation. Crusoe, surveying the range of options, 

market. j ^ '-' ^ 

worked in this or that field as his inclinations directed. 
The return from his industry flowed to him with equal 
directness. There was no obstacle to his undertak- 
ing any enterprise and getting from it all its return. 
The small farmer or typical peasant had an almost 
equal freedom. Numerous opportunities for work 
existed on his small estate to which he could resort 
and from which a full compensation was secured. Both 
he and Crusoe had an open field. The outward flow of 
energy and the return flow of goods were unobstructed 
and stood in direct relation to each other. This direct- 
ness of all primitive relations is lost in the compHcated 
conditions of modern industry. From each individual 
there is as before an outward flow of energy and a 
return flow of goods, but between the two exists a gap 
which is filled in by other workmen aiding in the crea- 
tion of goods. Each worker puts in the industrial 
process a product of his own, and gets back some- 
thing he has not made or has only partly made. This 
process has been often explained, and does not need 
description. The essential point is that the workman, 
instead of watching his product slowly going through 
its many changes and finally claiming it, sells it in the 
general market and buys from it whatever he needs. 
The market thus stands for all the unseen changes 



Income as Modified by Economic Rights 217 

taking place between the day when the laborer does 
his work and the day when his final reward appears. 
Although the changes in the form of products take 
place beyond the gaze of the .workman, his interest in 
them is none the less, nor is the process different from 
the simple circuit of a Crusoe or a peasant. If the 
proper amount of goods fails to come back, the effects 
are as detrimental as if Crusoe or the peasant were 
deprived of their products. The market is open if the 
goods return in their proper amount ; it is closed or ob- 
structed if they do not. For each laborer the outward 
flow of energy and the return flow of goods must be 
unimpeded. The existence of a market creates com- 
plicated industrial operations, but it should preserve the 
simple relations enjoyed by an isolated worker. 

When each workman passes to other workmen the The right to 
product of his labor, the openness of the market can be P^^^^^^y- 
insured only by the right of publicity. He must be able 
to watch the circuit through which his product passes 
from the time it leaves him until it returns in the 
form of goods fit for use. Each workman must assert 
this right to maintain his economic freedom. Transac- 
tions hidden from the public view disturb the relations 
between the outflow of energy and the return of goods. 
Those who are exempted from inspection extract an 
unearned share from the gross product of industry, 
leaving the real workers to struggle as best they may 
for the diminished remainder. Unseen claimants are 
preferred creditors and get their shares paid first. 

Security is another right belonging to isolated pro- The right to 
ducers which must be fully preserved in modern indus- ^^^^"^y- 
try. The product of a man's industry must be left in 



2 1 8 The Theory of Prosperity 

his possession, and all his industrial relations must be 
free from arbitrary changes. A bad monetary standard 
is no less harmful than an unjust system of taxation. 
Speculation and other arbitrary changes in prices also 
violate the right of security by forcing men to sell at 
low prices and to buy back the final product at high rates. 
Security, moreover, is not merely a question of property 
rights. It also relates to utilities and activities. The 
consumer has a right to stable prices and the workman 
to a steady position. An arbitrary discharge of work- 
men disturbs industrial processes and should be carefully 
guarded against. 
The right to Industrial efficiency results from the formation of pro- 
cooperate, ductive groups whose members work for common ends 
but in different ways. This division of labor, though 
due to objective conditions, cannot be made effective 
unless psychic changes in men permit them to work and 
live in harmony. Group activity, a feeling of unity, and 
a community of interests add quite as much to the effi- 
ciency of labor as do favorable conditions. Cooperation 
is not an objective relation, but a cohesive instinct which 
will not be formed without some flow of income raising 
the condition of the group above the bare minimum of 
existence. A group with steadily lowering wages will 
not hold together. Social interests are created by 
upward movements in the standards of living, through 
which greater cohesion and more power in struggle are 
obtained. The right to cooperate is a right to increased 
income. 



Income as Modified by Economic Rights 219 

2. SOCIAL RIGHTS 
Tk. riM i. a Ko^e. Tke rigkt to <k.elcp. Tk. rigkt U^kol.o..e 
Vlr^. ne ri,M t. Uomogennty .f fopulaHon. Tke r^,kt i. 
decision by public opinion. 

Marriage is a permanent cooperation between the ^ nght to 
sexes under such conditions that its purity can be main- 
tained, and children raised that will be a credit to parents 
and the community; and it involves everything needed 
to secure these ends. There should be no necessity of 
living in a social environment where either party is 
tempted to break marital vows, or where the lack of 
income to support a family prevents pure social rela- 
tions. No industry should be continued --<!« ^"^^J; 
tions that force the rate of wages so low that healthy 
children and high standards are impossible or even put 
in jeopardy. The right to a home is essential to a 
pure social life, permanent sex relations demanding a 
Led material environment for each family. A home 
is not merely a place in which to sleep and eat; the e 
are merely animal needs. It is a secluded retreat w tti 
a standard of comfort above the mere physical wants 
for without privacy and income there is no homa 
Marriage thus requires an income above the indmdu^ 
wants of the contracting parties, and the need of this 
additional income is increased if the social env~n^ 
is so bad that home life must be protected from the de- 
grading influences of the locality. As soon as it become 
questionable whether young people can marry without 
Ling the social standards in which they have been reared, 
there is an evil at hand which society -ust;-ove or 
suffer a deterioration that corrupts social well-bemg. 



220 The Theory of Prosperity 

The right to Education has become an essential feature of state ac- 
develop. tivity. Each generation should reach a closer adjustment 
to its environment and be able to secure better conditions 
from it than its predecessors enjoyed. This means 
that sons should be better prepared for life, and their 
education should be extended through a longer period. 
The longer children are in school, the more complete 
can this preparation be, and the more efficient will they 
be when they enter the industrial world. Employment 
in some narrow field cramps the physical and mental 
development unless it is entered so late that individual 
habits, manners, and morals are fully formed. A single 
activity is depressing and demoralizing. The injury is 
counteracted only by the impulses and activities brought 
out by early education. 

Development should not, however, end with entrance 
into business. It is not enough that men become effi- 
cient workers. Every man should have an opportunity 
to bring his faculties to perfection. The stimulus to 
higher thoughts and activities lies mainly in the larger 
world which men enter only in their period of leisure. 
The process of education should continue as long as 
men live. They should never lose contact with the 
institutions bringing new truth within the reach of the 
masses. Books, lectures, illustrations, and experimental 
methods of presenting science can prevent that crust 
of ignorance and habit from forming which renders 
men static and reactionary. Old men are conservative 
because they have lost contact with the progressive 
elements in civilization. Had their education continued, 
this cramping of character might have been avoided. 
The right to develop means the right of contact with 



Income as Modified by Econotnic Rights 221 

all the elevating forces in a civilization as long as life 
lasts. Whatever narrows the environment of individ- 
uals or limits their activities, stops their growth and 
checks social progress. 

An opportunity to develop depends on the social The right to 
surroundings of a people as much as it does on the wholesome 
educational advantages. If a man must work and keep 
his family in contact with the degrading influences 
found in cities, it is impossible for him or them to 
maintain their moral purity. Wholesome social stand- 
ards are a part of the conditions demanded for the 
steady improvement of each person and family. It is 
not enough that moral principles and elevating ideals 
be taught in the schools. These can have but little 
permanent influence unless embodied in practical rules 
of conduct which individuals observe throughout life. 
School knowledge should be converted into social 
standards to which all must conform. Any community 
will be contaminated if a minority is allowed to violate 
social conventions and to introduce degrading practices. 
Men tend to sink to the level of their community or 
class. A progressive nation must therefore rigidly pre- 
serve its social standards and supplement them by 
higher and more complete expressions of national life. 

To create or to maintain social standards, the instincts, The right to 
habits, and mode of livine: of all the people must be so f^o""ogene- 
similar that they are moved by common impulses. Even lation. 
slight differences create race hatreds, and then each 
class is willing to forego or destroy a general advantage 
in the hope of injuring its enemies. Tendencies toward 
castes or sharply defined groups weaken the force of 
the principles and motives upon which common action 



222 The Theory of Prosperity 

depends. If the differences are marked enough to pre- 
vent intermarriage, each group can be set off against 
others, and no general rights or ideals are evolved 
through which social unity is secured. Of the bad 
effects of this state of affairs, the political condition 
of Austria bears witness. The differences in Ireland 
between the Orangemen and Catholics, and in the 
Southern States of the Union between the whites and 
blacks have the same origin, as has also the Anti- 
Semitic agitation in various countries. The lack of 
homogeneity in these and other cases blocks progress 
and arouses hatred, where otherwise cordial relations 
would grow up. 

It does not follow from these facts, however, that 
social harmony is impossible while differences in race 
and religion exist. If these races are in different 
localities or in different industries, no opposition of 
interests need appear. Each industry or locality can 
then develop customs, habits, and ideals suited to its 
peculiar needs, which would not conflict with those 
naturally developing in other places and industries. 
Economic freedom does not mean the dominance of 
a single race throughout the whole world. There may 
be as many types of men as there are different groups 
of industrial conditions. There is no single world en- 
vironment, but a number of local environments, with 
features so distinct that different types of men have 
naturally evolved. Each race should move toward that 
environment where its industrial efficiency is greatest, 
and leave other races in possession of regions where 
their superiority is apparent. To move negroes north 
instead of south, or to bring the people of Asia to 



Income as Modified by Economic Rights 223 

America, violates natural tendencies, and brings on 
social conflicts. Every race should be given security 
and prosperity where they belong, but should not be 
allowed to disturb the orderly development of regions 
for which they are not fitted. 

It is, however, homogeneity of population, not homo- The right to 
geneity of opinion, that is demanded. Population is ^^^^^lon by 
homogeneous when intermarriage takes place and com- opinion. 
mon instincts, habits, and impulses develop. Opinions 
are homogeneous when the premises of reasoning are 
the same, and this involves firmer social bonds and iden- 
tical environing conditions. The homogeneity of opin- 
ion is demanded only in the case of public decisions. 
The minority must cheerfully submit to the majority, 
and accept for the time a public decision reached 
through calm discussion. The decisions of a homo- 
geneous population will represent the general wel- 
fare. The great issues that the public decide are 
determined in the long run by the effect that given 
measures have on the adjustment of the nation to its 
environment. Laws will soon be repealed that fail 
to increase the general welfare. Democratic tenden- 
cies are advantageous in a homogeneous population, 
because the simple test of increased adjustment to 
the environment can always be applied, and the re- 
sults made apparent. But class or race hatreds dis- 
tract the attention and bias the opinion of so many 
that the application of the proper tests is impossible. 
Only when the people in a region or industry are con- 
scious of their similarity and kinship can a moral code 
develop binding them together in peaceful relations. 



224 ^^^ Theory of Prosperity 



3. RIGHTS OF LEISURE 

The right to comfort. The right to leisure. The right to recreation. 
The right to cleanliness. The right to scenery. 

The right to In modern nations the productive power is more than 
comfort. sufficient to produce the minimum of existence. There 
is a social surplus above the costs of production in 
which every worker has a right to share. All men 
cannot be made wealthy, but they can be made com- 
fortable by some of the social surplus going to each of 
them. The right to comfort is a right to share in the 
social surplus; it demands that the workman get on 
each increment of his production some surplus above its 
cost. To be free is to be comfortable, to have a home 
and the decencies that go with it. Frugality, con- 
tentment, and domestic bliss are impossible unless the 
surplus of the isolated worker is retained by the work- 
man in complex industrial conditions. The right to 
comfort is not a right to equality in the distribution of 
wealth, but to that income necessary to secure to the 
worker the best physical conditions. Mere living means 
unwilling, painful labor, for no one works efficiently 
without surplus energy. 
The right to The right to leisure is a corollary to the right to 
eisure. comfort. No matter what income a person receives, 

he cannot be comfortable without some time for enjoy- 
ment. Leisure means more than time to eat and sleep. 
The full revival of mental and physical powers demands 
a period of rest in which the loss of surplus energy can 
be restored. A normal working day must end while 
work is still pleasurable. Any drain on the system 



Income as Modified by Economic Rights 225 

reduces the vitality of the worker, and causes a reduc- 
tion in future production greater than the present gain 
from overwork. The right to leisure is in harmony 
with the greatest efficiency, and cannot be lost by 
workmen without detriment to other classes besides 
themselves. 

The right to recreation may be regarded as an out- The right to 
come of the narrow division of labor demanded by pro- 'recreation, 
duction on a large scale; for then work is a constant 
repetition of single acts, tiring some parts of the body 
but leaving other parts without sufficient exercise. The 
normal man must have all the parts of his body devel- 
oped and all his mental powers kept active. Recreation 
is the only process by which this is accomplished. 
Each one must have outside of his industrial occupation 
enough activity to revive and sustain the mental and 
physical powers of the normal man. There would also 
be a racial degeneration if each class neglected the 
aptitudes and mental qualities not demanded in its 
particular occupation. The homogeneity of population 
would then be destroyed, and with it would disappear 
the bonds that keep society peaceful and harmonious. 

Leisure is a demand for time ; recreation is a demand 
for active occupation outside of labor hours, and in- 
volves conditions that can be secured only by large 
social expenditures. Walking, cycling, travelling, and 
other forms of exercise are made agreeable only by 
pleasant surroundings ; hence, good roads, attractive 
streets, fine parks, and wholesome places of resort are 
necessary. Mental recreation also demands churches, 
concerts, lectures, libraries, public discussions, and other 
means of exciting spiritual life. Present expenditures 

Q 



226 The Theory of Prosperity 

for these purposes indicate that this right is partially 
recognized, but it must gain more complete recognition 
before industrial efficiency reaches its maximum. 
The right to The isolated worker in a primitive society had all 
cleanhness. ^j^^ conditions upon which health, vigor, and physical 
well-being depended. The control of a quantity of land 
enabled him to avoid the evil consequences naturally 
arising from the pollution caused by himself, his family, 
and his stock. With a sparse population nature easily 
restores normal conditions by transforming refuse matter 
into useful products; but the close proximity of men 
in advanced societies destroys their power to keep 
clean and their surroundings pure without similar 
cleanliness and purity on the part of their neigh- 
bors. The filth of one house or region destroys 
the exemption from disease which isolated families 
enjoy. A whole city may suffer from an epidemic 
started among a few families or in some neglected 
street. Where no disease is communicated, the refuse 
of uncleanly places contaminates the air and depresses 
every one. Even food is poisoned by the presence of 
noxious compounds and by microbes. The surplus 
energy of city people is reduced by these evils and 
no hope of improvement exists except in measures 
affecting all persons and places. Clear water, pure air, 
and clean streets are matters of public interest, and for 
these ends the social surplus should be freely used. 
Public control should be extended to everything that 
lowers the vitality of the working population. 
The right to The closc contact of men in modern societies also 
affects men unfavorably through their loss of touch 
with nature. The beautiful in nature is marred or 



scenery. 



Income as Modified by Economic Rights 227 

destroyed by the processes through which wealth is 
created. The eye needs protection as well as other 
organs of the body, and the impressions that come 
through it are as important as those made by any 
other contact wdth the external world. Men should 
provide for their visual environment with the same 
care they exert in providing for other material condi- 
tions. Not only must natural scenery be preserved 
and restored, but the demands of city life for corres- 
ponding advantages in its architecture, museums, and 
parks must be met. The eye should never be need- 
lessly wearied nor its sensitiveness to harmonious rela- 
tions destroyed. Bad streets, incongruous buildings, 
and glaring advertisements depress men, reduce their 
productive power, and check the growth of social 
feelings. 

4. EXCEPTIONAL RIGHTS 

The right to relief. The right of women to income. 

Besides the general rights belonging to every person The right to 
in the industrial world, there are two which grow out '^^^^^^^ 
of special conditions. Every one is liable to misfor- 
tunes, and the hazards of business are such that fore- 
thought cannot guard against them. The safest of 
investments become worthless, health breaks down, 
accidents happen, employment is uncertain, and sick- 
ness reduces families to a condition where aid is neces- 
sary. Against these and similar hardships no individual 
can adequately provide, and if he could, it would be 
more economical to have them guarded against by 
public measures. The orderly development of higher 



228 The Theory of Prosperity 

wants, tastes, and standards is delayed or prevented by 
any disturbing fear that the forethought and energy 
providing for them will not attain the desired end. 
Society alone can remove this dread by giving full 
protection against the evils of the industrial world. 
The energy and the skill of each person should be left 
free so that the reward for work can come to the 
worker ; but misfortune is not an individual affair due 
to conditions that individuals make. The evil may lie 
in the environment, as in the case of a failure of crops ; 
it may be due to accidents for which others are to 
blame ; to the diseases and degradation of bad local con- 
ditions ; or to social disorders over which single persons 
have no control In such cases social evils should be 
met by social action. Make the individual responsible 
for the results of his own acts, but do not let him suffer 
from what he could not avoid. A system of relief is 
an essential to industrial freedom ; economic activity 
will not reach its maximum until it is so effective that 
the energy of individuals can be appHed to the satis- 
faction of their own wants. The social surplus is more 
than sufficient to provide for all the exigencies that 
persons cannot control. 
The right of There is another special right growing out of the pecul- 
!I°?I^ *° iar position of women. Certain restrictions to woman's 
activities have become general, partly the result of her 
position as a mother, and partly as an outcome of social 
conventions which have grown up in advanced nations. It 
is not necessary to determine whether woman's evils are 
physical or social. If physical, there is a natural ground 
for giving woman a preference ; if social, this pref- 
erence should continue until society is reorganized on 



income. 



Income as Modified by Econo7nic Rights 229 

some other plan. While husbands and fathers demand 
that wives and daughters refrain from earning an income, 
public opinion and law should support the claim of 
women to an adequate support. It is not enough that 
wives have the right of support, and that daughters be 
provided for, so long as their father's home remains 
open. The disabilities of women are general and 
affect all women. The provision for them should also 
be general, and is most needed by those having neither 
friends nor homes. In some occupations women have 
an income adequate for their support. This, however, 
cannot become the general rule so long as the present 
family arrangements and social conventions continue. 
Grave evils must continue until society gives to women 
workers an income large enough to insure their physi- 
cal and moral well-being. The operation of economic 
forces may do this for men, but it must fail in the case 
of women so long as they suffer from physical and social 
disabilities. The social surplus should therefore be 
freely used for women. No one has a right to bring 
a girl into the world without providing for her support, 
and this support should have a first claim on every 
estate. If women are kept from industry for family 
reasons, the family should provide an income for them. 
Where private means of support fail, preference should 
be given them in industries for which they are es- 
pecially fitted. No society is safe, nor can it be moral 
and progressive, until women are fully protected and 
have independent incomes. The law should compel 
it, if higher motives do not move men to compensate 
women for the evils to which they are liable, and from 
which they cannot escape without losing qualities that 



230 The Theory of Prosperity 

men admire. Women will be crushed or idealized; and 
if idealized, income and independence are essential. 
The great problem for men, after all, is the problem 
of women. Men do the work and bear the burdens of 
to-day. But women shape the men of to-morrow ; the 
outgo of energy toward them creates a store upon which 
the future can draw. 
A summary. A self-perpetuating round of production and con- 
sumption is the goal of economic activity, and repre- 
sents an equilibrium between the outgo of energy and 
the return flow of goods. 

Goods 

^ % 

Utility = Energy 

If the goods produced do not give enough utility to 
restore the lost energy, the equihbrium is reestablished 
* by the growth of desire, and when once formed, subse- 
quent improvements make an excess of energy possible. 
The accustomed activity now produces more goods, 
from which come more utility and more energy. The 
excess must go out, but need not bring back a corre- 
sponding amount of utility and nutriment. Impulse is 
the exit of this energy not needed to keep up the equi- 
librium between waste and repair. Katabolic tenden- 
cies can be brought to an equilibrium only in situations 
demanding more energy, but this new equilibrium will 
be no more stable than its predecessors. The impulses 
grow stronger and changes in the environment become 
more frequent as the surplus of energy increases. In 
the first stages of progress, the excess of energy is 
irregular and fitful, only manifesting itself when the food 
supply is abundant or when some unusual event arouses 



Income as Modified by Economic Rights 231 

the individual. Love, passion, violence, mob rule, and 
other outbursts of feeling represent an excess which is 
not steady and enduring enough for impulse to acquire 
a definite end. These fickle impulses are displaced by 
higher forms as soon as the excess becomes constant 
and persistent. An enduring excess must go out in the 
direction of its anabolic complement. If it is merely 
an erratic discharge, the energy is lost and the impulse 
lacks the surplus vitality needed to repeat itself. There 
is thus a marked difference between the capricious im- 
pulses that go out in any direction and those that have 
fixed avenues of exit; yet they all have a common 
origin in the excess of energy, and become definite as 
they increase in intensity. The growth of desire gives 
an anabohc complement to which the increasing kata- 
boHc excess must go out. Any failure of the two 
tendencies to supplement each other would ultimately 
destroy the individual or group in which they were 
present. 

Among primitive men, as in the animal world, the 
katabolic excess of the male is temporary, and comes 
during the season when the food supply is abundant. 
Sexual impulse is thus capricious and fitful, with no 
end or hold on future action ; but when family relations 
are formed, men have a permanent excess of energy 
which goes out toward their wives and children. Im- 
pulse now becomes as fixed as are the conditions cre- 
ating the excess of energy. The psychic feeling must 
be as definite as is the direction in which the surplus 
energy goes. An increase of the katabolic excess 
beyond the needs of the family becomes possible only 
when new impulses of equal definiteness and constancy 



232 The Theory of Prosperity 

have been aroused. Religion, giving ends and ideals of 
this character, develops along with the growth of surplus 
energy, and following it come altruistic impulses that 
impel more activity and forethought in behalf of others. 
With the rise of cities and of nations a new excess of 
energy is created and new impulses elevate national and 
local ideals. Each rise in the plane of civilization thus 
creates anabolic concepts and ideals that demand for 
their realization a greater katabolic excess in men. 
Idealism is a process of separating anabolic and kata- 
boHc tendencies, so that in their complementary rela- 
tions more energy is demanded and more satisfaction 
obtained than if each individual had in himself the 
conditions giving an equilibrium between activity and 
consumption. Economic rights represent a further 
growth of this excess. They become definite and con- 
stant as society, industry, and place relations (especially 
those of city life) become more clearly anabolic, and 
thus furnish ideals toward which the activity of men 
may go out. To the degree that men are sustained by 
their environment, social and physical, they can be 
generous in action and disregard the return flow of 
goods upon which the attention of an isolated self- 
sustaining man must always be centred. Economic 
rights therefore are not the product of normal ten- 
dencies, but of an excess of energy demanding no 
return in goods. They are felt by those who have 
more than they need and hence want nothing personal. 
Those who have less than the normal standard gain by 
rights, but they do not establish or enforce them. A 
right is a claim some one else will enforce. The per- 
manent excess in energy of the more vigorous is trans- 



Income as Modified by Economic Rights 233 

formed into an impulse to elevate others to their 
standards, and its amount measures the force that a 
nation or community exerts in maintaining the rights 
of the less fortunate. 

Social standards and rights, though often con- 
fused, have in reality distinct bases. Standards are 
built up and maintained by the class that profit by 
them. To enforce them its members must withdraw 
from production, restrict their number, or in some way 
exert an influence on distribution. All these forces 
must be set in motion by themselves, and nothing other- 
wise obtained belongs to their standard. It is thus a 
part of the economic equilibrium that normal men must 
secure. Rights give income beyond this amount. The 
greater equality springs from the excess of energy that 
creates social bonds by evoking ideals and impulses. 

New rights are more easily acquired in industries that 
regularly share in the social surplus. Here employers 
are interested in the efficiency of their laborers, and are 
willing to adopt standards that could not be obtained in 
industries to which nothing goes except the minimum 
return for labor. Trusts, large corporations, and stable 
industries find it advantageous to raise wages so that by 
a selective process the more efficient and trustworthy 
remain in their employment. This means a rate of 
wages somewhat above the marginal return, and the 
existence of a class of laborers exempted from the fluc- 
tuations and uncertainties of marginal production. In- 
dustries of this kind, feeling but slightly the changes in 
prices that cripple and often crush the producers at the 
margin of production, can maintain standards that the 
latter would find impossible. These higher standards 



statement. 



234 The Theory of Prosperity 

become the norms by which the public measures the 
just rate of wages. By the process of idealization they 
are made universal, and imposed on all industries. A 
standard once seen, and shown to be practicable, be- 
comes a social ideal creating pressure that demands its 
enforcement. 

A final re- In the first part of this book the discussion centred 

on the problems of economic equilibrium. Where each 
individual is independent and self-sustaining, the out- 
flow of energy and the return flow of goods are equal. 
The problem of work and pay involves only those rela- 
tions between man and nature which give the normal 
man a perpetual round of production and consump- 
tion. There is a second measure of normality in the 
equality of supply and demand ; for the amount of goods 
withdrawn from the market cannot regularly exceed the 
supply brought to it. The motives for production in- 
crease as wants grow in intensity; but costs fall off 
with the growth of productive power, thus destroying 
the equality between it and the return in goods. A 
new equilibrium is created on the market by the equality 
of marginal expense and marginal utility. Wants grow 
more rapidly than productive power; values rise, and 
producers gain a monopoly power equal to the differ- 
ence between cost and the expense of goods. Monopoly 
is thus essential to a market equilibrium, and the mo- 
nopoly fund has its size fixed by the natural excess of 
demand over supply. Intense wants and low costs of 
production have no other means of equating themselves. 
A third test of normality is the equilibrium between 
the destruction and replacement of capital. Viewed in 
this way capital is constant in amount, but changing 



Income as Modified by Economic Rights 235 

in form, thus making it too broad a term to be con- 
trasted with land and labor. The equilibrium is between 
the energy of the past spent on the present, and that of 
the present spent on the future. There is no equality 
in the destruction and replacement of capital goods. 
More capital goods are each year used up than are 
replaced, many of them reappearing only as improve- 
ments in land or men. But the whole fund is self-per- 
petuating, and gives a return, much of which is included 
under rent and wages. 

Normal conditions are satisfied when the economic 
equilibrium is maintained and each worker is self-sus- 
taining. There is, however, a constant tendency to 
disturb the normal equilibrium by the creation of 
an excess of energy, for it is no sooner attained than 
it is again disturbed by the appearance of a new excess. 
Wants grow, and men, producing goods at decreasing 
cost, work longer and more intensely. An enduring 
excess is only possible where some complementary 
relation exists by which the excess of some individuals 
or classes is equalled by a corresponding deficit of other 
persons or classes. There is in a society an outflow of 
energy that does not return in the form of goods to 
those who put it forth. One part gets more than 
it gives, and another part gives more than it gets ; or 
it may be that individual men put out more energy and 
the return is in the form of permanent improvements, 
institutions, and social betterments that all enjoy. The 
future of society is the anabolic complement of its pres- 
ent katabolic output. Children get what fathers create. 
The final Utopia is the recipient of all the surplus of 
preceding ages. 



236 The Theory of Prosperity 

In a primitive society the flow of goods is from the 
weak to the strong, and exploitation is its measure. 
There is an excess of natural force aiding producers, 
and it is turned over by them to their rulers, leaders, 
and conquerors. In advanced societies, through the 
improvements in men, there is an excess of human 
energy; the flow of surplus goods changes its direc- 
tion, and the strong give of their surplus to the weak ; 
men become katabolic, and to remain normal must 
seek some anaboUc complement; personal ideals are 
increasingly katabolic, demanding a greater output of 
energy and placing more restrictions on consumption ; 
social ideals and institutions are increasingly anabolic, 
and from them sources of pain are steadily ehminated. 
The environment is thus transformed so that all its 
relations give pleasure in increasing quantities. 

Reciprocal relations depend on this excess of energy, 
and society is more firmly welded as it grows in amount. 
Each class or group goes out in feeling toward those 
places and persons that complement its existence. This 
impulse is a pressure to make other things and per- 
sons better than they are, and then for each person 
or class to differentiate itself more fully from them, so 
as to increase and intensify the complementary relations. 
The economic equiUbrium working through desire tends 
to make all persons equal, independent, and self-sus- 
taining. The excess of energy as impulse differenti- 
ates, socializes, and idealizes, and hence creates bonds 
that hold the partly-different together. The social ideal 
is this partly-different — the better-than-self. No matter 
how well regulated is the Hfe of the individual, the 
better-than-self is still above him, and the struggle for 



Income as Modified by Economic Rights 237 

the new level creates an additional adjustment and more 
self-control. The social ideal is thus a perpetual up- 
building force, constantly eliminating imperfections, but 
as constantly causing the perception of others through 
the higher normal life which their eUmination makes 
possible. The better-than-self evokes the activity needed 
for its attainment, but this activity elevates the ideal 
more rapidly than it does the man who strives after it. 
Each new equilibrium creates an excess of energy, and 
each excess forces a new equilibrium. The economic 
and social thus react on each other and impel men 
toward a goal that is moved farther away by every 
effort to reach it. Perfection is never possible while 
man and his environment react favorably on each other. 
The ideal is not, however, a distant end to be reached 
only after an endless succession of endeavors. A part 
of adjustment is as ideal as it ever can be. There is a 
progress toward an equilibrium which depends on desire 
and a progress in the expansion of wants and activities 
that is attained through impulse. The one creates the 
normal, the other the ideal. These two forms of prog- 
ress exist side by side, but in different fields. Men 
gain some ends in one way, some in the other. A civili- 
zation is forceful as the desire for the normal and the 
impulse toward the ideal find distinct but concurrent 
means of expression. They are both present realities 
and demand constant unswerving recognition. 



The Development of 

English Thought 

A STUDY IN THE ECONOMIC INTERPRETATION 
OF HISTORY 

By SIMON R PATTEN 

Professor of Political Econojny at the University of Pennsylvania 

Cloth Extra. Crown 8vo. $3.00 

CONTENTS: 

Chapter I. — The Theory 

National Character — Kinds of Environments — Adjustment to the Environment — 
Race Ideals — The Stratification of Society — The Clingers — The Sensualists — 
The Stalwarts — The Mugwumps — The Development of Classes — Stages in the 
Progress of Thought — Curves of Thought. 

Chapter II. — The Antecedents of English Thought 

Primal Economic Conditions — The Early Germans — The Catholic Supremacy — 
The Economic Influence of the Early Church — The Fifteenth Century — Political 
Conditions — The Church Programme — Crime and Vice — Indulgences — Social 
Problems — The New Wave of Sensualism. 

Chapter III.— The Calvinists 

Calvinism — Frugalism — Word Visualism — Puritan Opposition to Vice — Merry 
England — Primitive Traits — Public Amusements — The Disappearance of the 
Puritans — On the Interpretation of Great Writers — Thomas Hobbes — John 
Locke — Results of Locke's Analysis — The Deists — The Outcome. 

Chapter IV.— The Moralists 

Picture of the Eighteenth Century — Bernard Mandeville — David Hume — Adam 
Smith — The Religious Revival — Whitefield and Wesley — The Manly and 
Womanly Elements in Religion — Methodism — The Joint Influence of Adam 
Smith and Wesley. 

Chapter V, — The Economists 

The Decline of France — The Utopists — Thomas Malthus — David Ricardo — The 
Economic Philosophy — John Stuart Mill — Charles Darwin — The English Poets 
— The Oxford Movement — The New Religious Ideals. 

Chapter VI. — Concluding Remarks 

The Harmony of Religious and Economic Concepts — The Influence of Science — 
Socialism — Fields for Future Adjustment — The New Environment — The Triumph 
of Stalwartism — The New Thought Curves — The Sociahzing of Natural Religion. 



THE MACMILLAN COMPANY 

66 FIFTH AVENUE, NEW YORK 



The Development of English Thought 

A STUDY IN ECONOMIC INTERPRETATION OF HISTORY 

By SIMON N* PATTEN 
Professor of Political Econofny, University of Pennsylvania 



A BRIEF STATEMENT OF SOME IMPORTANT TOPICS TREATED 
IN THE VOLUME 

National Character. — It is not what a man sees or hears that determines his character, 
but the activities or motor reactions which these perceptions excite. These motor 
reactions are slowl}' acquired but persist indefinitely because they reappear in each 
succeeding generation. An environment, on the other hand, consists of certain 
definite objects and forces constituting at a given time the requisites for survival, 
and lasts only so long as a given group of these requisites has a supreme economic 
value. When a group of requisites is displaced by another, men are compelled to 
develop new activities in harmony with the new conditions. There has been, there- 
fore, not one perpetual environment, but a series of temporary environments, each 
of which has given to the race, through the economic struggle it has excited, certain 
characteristics that have become a part of the national character. And thus char- 
acter is the one enduring, growing element in a civilization ; when compared with 
it, all else, whether economic or physical, is temporary and fleeting. This view of 
the importance of character is not opposed to an economic interpretation of history, 
but is a plain deduction from it. That which endures has more importance than 
that which is frequently displaced. 

Types of Men. — Although the English race has many characteristics in common, 
there are several types of men so distinct in their feelings and premises that they do 
not respond to the same sentiments and arguments. No one type has been power- 
ful enough to subordinate the others, and hence progress has been due more to 
compromise than to sentiments universally accepted, or to doctrines and creeds 
based on principle. 

The Influence of Women. — There is, however, but one type of women. Mothers have 
the same interests, sentiments, and fears, and strive in the same way to guard the 
welfare of their homes. Women have seldom taken part in public discussions or 
written books of importance, but they have influenced the customs, institutions, and 
ideals of the race more than men because they have all striven for the same objects 
and have persisted until social life has been modified in the way they desire. The 
compromises of men have secured peace, but it is the activity of women that has 
caused the social progress of the last three centuries. 

Stalwarts and Mugwumps. — In the English race the most prominent psychic dis- 
tinction relates to the sensory and motor development of men. The stalwarts love 
activity and are impressed by clear ideals and bold principles. They are often 
carried away by high-soundmg phrases and are easily induced to enter upon rash 
schemes in the hope of realizing their ideals. The mugwumps do not come into 
close enough contact with objective conditions to compel the subordination of 
reason and analysis to motor adjustment. They are vigorous in thought but seldom 
carry out a policy with energy enough to ensure success. As a rule the mugwumps 
are aesthetic and moral, while the stalwarts are religious and economic. The politi- 
cal and social struggles of the present time are due to these opposing views, and the 
direction of future progress depends upon which of them becomes dominant. 



THE MACMILLAN COMPANY 

66 FIFTH AVENUE, NEW YORK 



JAN 21 1902 

1 COPY DEL, JOLt\(,'vii, 
jAH, 21 t302 



